ECO401 GDB Solution

The elasticity of supply measures the percentage change in the quantity supplied of a commodity as a result of percentage change in its price. It is a pure number and is positive because price and quantity move in the same direction. In general, percentage change in elasticity is used instead of absolute change in elasticity. The slope of supply is an unsatisfactory measure of the responsiveness in the quantity supplied of a commodity with respect to the change in its price but the concept of elasticity of supply has overcome this difficulty.

With reference to the above scenario, why is the slope of supply an unsatisfactory measure of the responsiveness in the quantity supplied of a commodity to a change in its price?

Note: Your answer must be within the range of 75-100 words.

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Solution:

The elasticity of supply measures the responsiveness the quantity supplied to a change in the price of that commodity.

Because supply curves slope upwards, the elasticity of supply is positive. As we move along a supply curve, positive price changes are associated with positive output changes. An increase in price causes an increase in quantity sold. The more elastic is supply the larger the percentage increase in quantity supplied in response to a given percentage change in price. Thus elastic supply curves are relatively flat and inelastic supply curves relatively steep.

There are important special cases. If the supply curve is vertical, -the quantity suplied does not change as prices changes- elasticity of supply is zero. A horizontal supply curve has an infinitely high elasticity of supply: A small drop in price would reduce the quantity producers are willing to supply from an indefinetely large amount to zero.

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