Supply Curves According to Their Elasticity
The appearance of the supply curve reflects the price elasticity of supply. When the supply curve is vertical, supply is perfectly inelastic. When the supply curve is horizontal, supply is perfectly elastic. When the supply curve is inelastic, it tends to have a steeper slope, and when the supply curve is elastic, it tends to have a flatter slope. Let’s examine each of these examples.
Perfectly Inelastic Supply Curve
As observed in the graph, the perfectly inelastic supply curve is vertical because the quantity supplied does not respond to a change in price. Notice that when the price increases from 40 to 60, the quantity supplied remains at 500. Therefore, in this extreme case, the price elasticity of supply is 0, and the quantity supplied remains the same regardless of the price.
Inelastic Supply Curve
When the supply curve is inelastic, the response of the quantity supplied to changes in price is proportionally smaller. In the graph, when the price increases from 40 to 70, the quantity rises from 400 to 600. Therefore, the increase in the quantity supplied is proportionally smaller than the increase in price.
Elasticity Equal to One
When elasticity is equal to 1, it means that the quantity supplied responds in the same proportion to a percentage change in price. In the graph, when the price increases from 30 to 60, which is a 100% increase, the quantity supplied rises from 300 to 600, also a 100% change. Therefore, the elasticity is equal to 1.
Note that elasticity is not unitary throughout the entire supply curve, only at these two points, because the percentage changes in both price and quantity are equal. If we move to two different points on this supply curve, this no longer holds. In other words, for a supply curve to have an elasticity equal to 1 throughout, it cannot be linear.
Elastic Supply Curve
Unlike the inelastic supply curve, when the supply curve is elastic, the response in quantity supplied to a change in price is proportionally greater. In the graph, when the price increases from 30 to 40, the quantity supplied rises from 400 to 600. This means that the percentage increase in quantity is greater compared to the price. Also, note that the elastic supply curve is flatter or has a lower slope than the inelastic supply curve.
Perfectly Elastic Supply Curve
The perfectly elastic supply curve is horizontal and occurs when the price elasticity of supply is so large that it approaches infinity. Therefore, the slightest change in price causes a significant variation in the quantity supplied. In other words, in this extreme case, even the smallest change in price triggers a major reaction in the quantity supplied.
Price Elasticity of Supply and Slope
Since the price elasticity of supply measures the response of quantity supplied to changes in price, it is closely related to the slope of the supply curve. Empirically, it can be observed that the flatter the supply curve, the greater the price elasticity of supply. Conversely, the steeper the supply curve, the lower the price elasticity of supply. In summary, greater supply elasticity is associated with a lower slope, while lower elasticity is associated with a steeper slope.