What this lesson teaches
I can use price elasticities of demand and supply to judge how large those changes will be.
Syllabus 8843, 2.1.2(g). Demand and Supply Analysis and its Applications: These outcomes can be affected by price elasticities of demand and supply
Make a guess
The price of fresh fish and of canned sardines both jump today. Whose sellers can offer much more by this afternoon?
- Fresh fish, because boats can head out again and land a second catch by afternoon.
- Neither, because supply cannot respond within a single day.
- Canned sardines, because sellers can release stock from warehouses.
Show the answer
Canned sardines, because sellers can release stock from warehouses.
Goods that store well can be sold from stocks as soon as the price rises. Fresh fish spoils, so sellers cannot hold stocks to release.
Supply is more elastic with spare capacity, stocks, mobile inputs and more time.
Spare capacity: a factory with idle machines and workers can raise output quickly, so supply is elastic.
Stocks: goods that can be stored, like canned food, can be released from warehouses when the price rises. Perishable goods, like fresh fish, cannot.
Ease of moving resources: if workers and machines can switch easily from other products, supply is more elastic.
Time: the longer the period, the more elastic supply becomes, as firms build factories, train workers and new firms enter. Housing and farm supply are very inelastic in the short run.
- Spare capacity
- More elastic.
- Stocks
- Storable goods: more elastic.
- Time
- Longer period: more elastic.
Worked example: Posters versus fruit trees
A print shop has idle printers, paper in stock and trained staff. An orchard is already harvesting all its mature trees, and new trees take years to bear fruit.
- The print shop can print more posters today if the price rises: supply is elastic.
- The orchard cannot grow more fruit this season: supply is very inelastic.
- Over several years, the orchard can plant more trees, so its supply becomes more elastic.
Watch out for this
Supply becomes more elastic simply because time passes.
Time matters because of what it allows: building capacity, training workers and new firms entering. Name the mechanism.
Check your understanding
Why is the supply of new HDB flats price inelastic in the short run?
- Demand for housing is high, so builders cannot keep up however much the price rises.
- Flats are expensive, so a rise in price makes buyers wait rather than buy.
- Building flats takes years, and land and builders cannot be added quickly.
Show the answer
Building flats takes years, and land and builders cannot be added quickly.
Right. Long construction times limit how fast supply can respond.