Elasticity supply
Definition : Measures the responsiveness of supply to a given change in price.
Formula for calculating price elasticity of supply :
If the figure is greater than one then the product is described as elastic or supply is sensitive to changes in price. This implies that the change in the quantity supplied by firms will be proportionately larger than the change in price. However, if the value is less than one then the good has an inelastic supply curve. Therefore, a change in price will have very little impact on the quantity supplied by the firm.
Table for rice - monthly price
As shown in the table above, in September 2012, the price of rice in the market is $590.50 per Metric ton which is an increase of 1.31% from $582.87 in August. However, in October the price of rice drops to $584.74 which is a drop of 0.98%.
Perfectly Inelastic supply curve
If the value of the price elasticity of supply is zero, then the curve is described as perfectly inelastic and the curve is completely vertical.
The price elasticity of supply is calculated by dividing the percentage change in supply by the percentage change in price. Since there is no change in supply whatever the price change, then supply is perfectly inelastic.
What is Perfectly Inelastic Supply ?
The elasticity of supply is defined as its ability to change when the surrounding market forces change. Thus, if other forces lead to a drastic change in supply, then it is deemed more elastic, but if the supply is relatively unaffected it is known as inelastic supply. As shown in the graph above, The X-axis denotes the quantity of a good and the Y-axis denotes the price. The curve is a straight line which is parallel to the Y-axis. This means that the supplied will be exactly the same no matter what the price is. Hence, the supply is completely inelastic and unresponsive to any changes in other factors except for price.
In Asia, rice is a community good and the staple food. It's price is being controlled by the government and the price is expected not to be too high. In this special case, the price of rice in August rose because the government intended to help the farmers.
As for the price of rice in October, the price dropped is because the price
of rice is set too high in August and affects the international market.
Thailand government promised the farmers a fixed price for their rice harvest
which had indirectly the earnings of secondary agents that sell off the rice to
the international market. However, the price of rice in October dropped since
they had to sell out the rice before it spoiled. In the effort of helping the
farmers to boost their income, the government starts to pay the farmers. This
has cause Thailand to be a less competitive party in the rice industry in 2012
due to the high price that are being charged by Thailand.
Posted by: Siew Pitt Jing
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