Question

What is the difference between industries that have elastic supply and those that have inelastic supply?

Short answer

Elastic supply industries adjust easily to price changes, while inelastic ones do not.

Step-by-step solution

Understanding Elasticity of Supply

Elasticity of supply measures how the quantity supplied of a good responds to changes in its price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price.

Identifying Elastic Supply Characteristics

In industries with elastic supply, the quantity supplied responds significantly to changes in price. A small price increase leads to a large increase in quantity supplied, and vice versa. This occurs when producers can easily adjust production levels, for instance, industries with abundant resources, flexible technologies, or excess production capacities.

Identifying Inelastic Supply Characteristics

In industries with inelastic supply, the quantity supplied responds little to changes in price. A change in price leads to only a small change in quantity supplied. This usually occurs due to constraints in rapidly increasing production, such as limited resources, technological limitations, or specialization of goods.

Comparing the Two

Industries with elastic supply can quickly scale production up or down in response to price changes, effectively stabilizing prices and ensuring availability. In contrast, industries with inelastic supply struggle to adjust quickly, which can lead to volatility in prices and shortages or surpluses.

Key concepts

Elastic Supply

Elasticity of supply examines how much the quantity of a product supplied changes when there is a change in its price. In industries where supply is elastic, even a small price increase can significantly boost how much is produced and offered in the market. To imagine this, think of a balloon that easily expands with a small amount of air.

This elasticity suggests that producers in these industries have the capability to adjust their production levels swiftly. They might possess excess capacity, the right technology, or readily available resources. Factors like flexible production processes and abundant raw materials play a crucial role here. For instance, a toy manufacturing company might swiftly ramp up production if toy prices rise, as they can quickly adapt their machinery and materials without much hassle.

Therefore, industries with an elastic supply tend to be more adaptable to changes in demand and price.

Inelastic Supply

Inelastic supply refers to a scenario where the quantity of goods supplied is not highly sensitive to changes in price. In such cases, even if the price increases significantly, the supplied quantity might not rise much. It is akin to a rubber band that doesn't stretch very easily.

Industries experiencing inelastic supply often face constraints. These could be technological limitations, specialized production techniques, or limited resources. For instance, the supply of vintage wine may not increase dramatically with price hikes because vineyards and wine-aging processes take time and cannot be expedited.

This lack of responsiveness means that price changes do not result in instant availability of more products, leading to scenarios where demand could exceed supply or vice versa.

Price Changes Response

Price changes influence industries differently, depending on whether they have elastic or inelastic supply. When it comes to elastic supply, industries can quickly adapt, bringing more or fewer products to the market in response to price changes. This responsiveness helps mitigate large fluctuations in market prices, maintaining equilibrium.

Therefore, such industries can stabilize their prices over time due to their flexible production systems. On the contrary, with inelastic supply, industries find it harder to adjust promptly to price changes. Such sluggishness can cause significant price swings, leading to either overabundance or scarcity.

This variation in response affects the overall stability of a market and impacts both consumers and producers in profound ways.