Civil Engineering Reference
In-Depth Information
Elasticity
We introduced the concept of elasticity in
Chapter 4
(see
Key Point 4.3
for a
summary). Economists are often interested in the degree to which supply, or
demand, responds to changes in market conditions. For example, the measurement
of price responsiveness is termed
price elasticity
. It may be defined as:
a measurement of the degree of responsiveness of supply to a change in price.
A numerical value for the
price elasticity of supply
(PES) is calculated using the
same midpoint approach outlined in the elasticity of demand section on page 69. In
this instance, the formula is:
PES =
percentage change in quantity supplied
percentage change in price
What the formula tells us is the relative amount by which the quantity supplied will
change in relation to price changes. For example, if a 10 per cent increase in price
leads to a 1 per cent increase in the quantity supplied the price elasticity of supply
is 0.1. That is a very small response. There are in effect three types of measure that
economists use as a reference point to discuss price elasticity.
1
Price-inelastic supply
When the numerical coefficient of the price elasticity of supply calculation
is less than 1, supply is said to be 'inelastic'. This will always occur when the
percentage figure for the change in supply is smaller than the percentage figure
for the change in price. A PES coefficient of anything between 0 and 1 represents
a situation of inelastic supply. The introductory example in which a 10 per
cent increase in price led to a very small response in supply suggests a price-
inelastic response: the measured coefficient was 0.1. In most cases where firms
are supplying into the construction industry the price elasticity of supply, in the
short term at least, will be inelastic.
2
Price-elastic supply
When the numerical value of the price elasticity of supply calculation is greater
than 1, supply is said to be 'elastic'. This will always be the case when the
percentage change in supply is larger than the percentage change in price. For
example, if a 5 per cent rise in price leads to a 50 per cent increase in quantity
supplied, the PES coefficient will be 10. In other words, a small change in price
elicits a large response in supply. This would be an unusual occurrence in the
markets for construction or property - but not impossible.
3
Unit-elastic supply
This is the most hypothetical case, as it describes a situation in which a
percentage change in price leads to an identical percentage change in supply.
This will always produce a coefficient value of 1, since the same figure appears
on both the top and bottom lines of the price elasticity of supply formula.
