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INTRODUCTION TO INDIAN ECONOMY 1.12 ELASTICITY OF SUPPLY PRESENTED BY AYUSSH SANGHI
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ELASTICITY OF SUPPLY According to the law of supply: "Higher the price higher would be the quantity supplied." o Price elasticity of supply can defined as, "degree of responsiveness of quantity supplied to a change in price."
ELASTICITY OF SUPPLY Formula: Elasticity of supply Percentage change in quantity supplied/percentage change in Price
ELASTICITY OF SUPPLY Conclusion Elastic: Supply for a good is said to be elastic if the quantity supplied responds substantially to change in the price. Inelastic: Supply is said to be inelastic if the quantity supplied responds to a smaller extent to changes in the price.
FACTORS AFFECTING ELASTICITY OF SUPPLY The most important factor is that price elasticity of supply depends on the flexibility of sellers to change the quantity of the good they produce. Example: Natural areas like mountains has an inelastic supply because it is almost impossible to produce more of it. On the other hand, manufactured goods such as books, cars and televisions have elastic supplies because businesses that produce them can produce more if they get a higher price
FACTORS AFFECTING ELASTICITY OF SUPPLY o The second important factor in determination of price elasticity of supply is the time period being considered Supply is more elastic in the long run. o On the other hand, in short period of time, firms cannot easily change the size of their factories to make more or less of a good. Thus, in the short run, the quantity supplied is not very responsive to the price. Hence inelastic. By contrast, over long periods of time, firms can build new factories or close old ones. o In addition, new firms can enter the market, and old firms can shut down. Thus, in the long run, the quantity supplied can respond substantially to price changes.
CASE STUDY TO UNDERSTAND ELASTICITY OF SUPPLY OPEC During 1970s, members of the Organization of Petroleum Exporting Countries (OPEC) decided to increase the world price of oil to ncrease their incomes. These countries accomplished this goal by jointly reducing the amount of oil they supplied o During 1973 to 1974, the price of oil (adjusted for overall inflation) increased by more than 50 percent During 1979 to 1981, the price of oil approximately doubled o If we adjust it, according to inflation, price in 2004, the price of crude oil reached $91 per barrel
CASE STUDY TO UNDERSTAND ELASTICITY OF SUPPLY OPEC o During 1982 to 1985, the price of oil steadily declined by about 10 percent per OPEC countries, facing huge dissatisfaction during this period. the price of oil plunged 45 percent. started in 1970, and it stayed at that low level throughout most of the o In 1986, cooperation among OPEC members completely broke down, and o In 1990, the price of oil (adjusted for overall inflation) was back to where it 1990s. o In the beginning of 2000s, the price of oil rose again due to increased demand and rapidly growing Chinese economy, but it did not approach the levels of 1981.
CASE STUDY TO UNDERSTAND ELASTICITY OF SUPPLY OPEC This OPEC case study of the 1970s and 1980s shows how supply and demand can behave differently in the short run and in the long run Short-Run: Both the supply and demand for oil is relatively nelastic. Supply is inelastic due to the quantity of oil reserves known and the capacity for drilling oil cannot be changed in short time. Demand is inelastic as buying habits do not respond immediately to change in price.