11 Jul Inelastic Supply
What is Inelastic Supply?
Definition: The supply of a good is said to be inelastic if a change in the price offered for it does not result in a proportionate change in the quantity supplied.
What does Inelastic Supply mean?
Consider a situation where a particular good is selling for $100. At this price, producers supply one million units. Now, if buyers drive the price up to $125 per unit, which is an increase of 25%, but the number of units supplied rises by only 10%, the supply is said to be inelastic. The increase in units supplied has not risen in proportion to the rise in price.
Why would supply not increase in proportion to a rise in price? One reason could be that producers may require time to ramp up their production capacity. They may need to buy new machinery or identify new sources of raw material. This could lead to delays in increasing production.
Inelastic supply can be segregated into two categories. These are:
⇨ Relatively inelastic – this is where supply changes with a change in price, but not in direct proportion.
⇨ Perfectly inelastic – the supply of a good is said to be perfectly inelastic if a change in price does not result in any difference at all in quantity supplied.
Example of Inelastic Supply
Let us consider two examples to understand the concept of inelastic supply. A seller of fresh fruit and vegetables would like to sell the entire stock by the end of the day. If any produce is left over, it would have to be thrown away. In this situation, supply is inelastic. A change in price does not affect the quantity that will be sold.
Another example of inelastic supply is a work of art. The Pieta is a sculpture created by Michelangelo. There is only one such sculpture, and the quantity will not change regardless of the price that is offered for it.
The availability of products that have an inelastic supply does not change in proportion to the change in price.