Examples of Price Elasticity of Supply in Various Markets

Understanding the relationship between price and quantity supplied is a crucial aspect of economic theory. The concept known as the elasticity of supply measures how quantity supplied responds to a change in price. While this phenomenon is observable across various markets, let's explore some specific examples to grasp its dynamics more clearly.

The Dynamics of Supply Elasticity

Elasticity of supply is measured by the responsiveness of the quantity supplied to a given change in price. A product is considered more elastic if a percentage change in quantity supplied results in a larger percentage change in price, and vice versa. This relationship can vary significantly across different industries and products.

Supply Elasticity in the Auto Industry

Consider the car market, where elasticity can be quite high for certain manufacturers. For example, if the price of cars increases by 25%, a car manufacturer like Ford may have excess capacity and could increase production relatively easily by adding another shift. This results in a significant increase in quantity supplied, reflecting the product's high elasticity.

Conversely, if the same 25% price increase hits a manufacturer that is already operating at full capacity, such as a luxury car brand with limited production facilities, the quantity supplied may not increase. This situation demonstrates a relatively inelastic supply, where changes in price do not lead to substantial changes in quantity supplied.

The Luxury Cruise Market

Looking at the luxury cruise market, the situation is starkly different. If the price of a luxury cruise increases by 25%, it would take around three years to build a new cruise ship, and only a limited number of shipyards are capable of building these vessels. Given the constraints, the quantity supplied would remain unchanged, illustrating a highly inelastic supply response.

Elasticity by Industry and Location

Consider the gas station industry as a local market. Gas stations compete similarly on price, and if one station lowers its fuel prices, others might follow to maintain their market share. This close competition indicates a relatively elastic supply, as a small price change can significantly alter quantity supplied.

In contrast, when examining the market for milk, the elasticity can be significantly lower. Discounting prices in different stores might lead to a shift in customer buying patterns, but the overall supply is less responsive to price changes. This scenario reflects a more inelastic supply, where changes in price do not significantly impact the quantity supplied.

The Case of the Jeans Industry

The market for jeans is an example where products of different brands may have vastly different prices based on perceived quality and style rather than actual quality. Brands like Levi's might attract a consistent customer base without significantly altering their supply in response to price changes, showcasing an almost inelastic supply curve.

On the other hand, designer jeans might respond more dynamically to price changes. If the price for designer jeans increases, some consumers might switch to less expensive brands, leading to a larger change in quantity supplied compared to the price increase, thus showing a more elastic supply.

The US Housing Market Boom

An illustrative example of supply elasticity can be observed in the U.S. housing market leading up to the subprime mortgage crisis. As demand for housing increased, housing prices rose, and in response, more suppliers entered the market, increasing the quantity supplied. This cycle continued until the unsustainable growth created a bubble that eventually burst.

In this scenario, supply elasticity played a significant role in the expansion and potential collapse of the market. The high elasticity of supply, triggered by the surge in demand and the subsequent entry of more suppliers, contributed to the rapid and unsustainable growth in the market.

Understanding supply elasticity is vital for businesses and policymakers to predict and manage market response to changes in price. By recognizing the varying levels of elasticity across different industries and products, stakeholders can make more informed decisions and strategies.

Conclusion

The elasticity of supply is not a static concept but one that varies significantly based on industry dynamics, market competition, and consumer behavior. From the auto market to housing, the responses to price changes offer valuable insights into supply behavior and market stability.