Glamor Economics

Chapter 28

Chapter 4 Section 9 Behind the Tight Supply of Energy——Price Elasticity of Supply

Similar to elastic demand, supply is also elastic.Price elasticity of supply, also known as supply elasticity, measures the responsiveness of quantity supplied to price.A small change in the price of some commodities can cause a large change in the quantity supplied, indicating that the supply of this commodity is elastic.A large change in the price of some commodities can only cause a small change in the quantity supplied, indicating that the supply of this commodity is inelastic.The following uses the supply elasticity coefficient to express the size of the supply elasticity:

Price elasticity of supply = percent change in quantity supplied/percent change in price
When the elasticity is greater than 1, the supply is elastic and the supply curve is relatively sloping; if it is less than 1, the supply is inelastic and the supply curve is relatively steep; when it is equal to 1, the supply is unit elastic, indicating that the change in quantity supplied is equal to the change in price , the supply curve is a 45-degree line; equal to 0, the supply is completely inelastic, indicating that no matter how the price changes, the quantity supplied remains unchanged, and the supply curve is vertical downward.Because the higher the price is, the more willing the producer is to supply the product, and there is a relationship between price and quantity supplied that changes in the same direction, so the price elasticity of supply is generally positive.

In California, the government has implemented a series of strict energy control plans since the 20s because the energy supply has been relatively tight for a long time.Some economists suggest using market mechanisms to regulate. Their reasoning is that if California is really short of energy, then prices will rise. On the one hand, people will reduce energy use, and on the other hand, energy suppliers will increase supply. The energy tension will be reversed.Instigated by these economists, the Reagan administration gave up energy control in California, causing a sharp increase in energy consumption and price increases. The price of electricity alone increased by more than ten times. However, the relationship between energy supply and demand in California has not changed due to market regulation. Tend to ease, but more tense. In the summer of 70, California encountered an unprecedented power supply crisis. Finally, the California government reactivated strict energy control measures.

Why are the theories of these economists not working?Due to the strong specificity of energy production, the large occupation of fixed assets, and the long production cycle, the energy supply is inelastic.Although rising energy prices will increase supply, the increase is very limited.At the same time, as energy is a necessity of life, people's demand for it will not be greatly reduced due to price increases, that is, its demand is also inelastic.This will cause further tension in energy supply and push prices further up.The rise in prices has made many users unable to pay electricity bills in time, making energy companies not only unable to obtain high profits, but on the verge of bankruptcy, and have to turn to the government for help and protection.

So what are the factors that affect the elasticity of supply?

1. Time
This is a very important factor affecting the elasticity of supply.When the price of a commodity changes, it takes time for the supplier to adjust the output.In a short period of time, if the supply side wants to increase production in time according to the price increase of the commodity, or if it wants to reduce the production in time according to the price reduction of the commodity, it will be difficult to varying degrees, so the supply elasticity is small; on the contrary, in a longer period of time Within a short period of time, the expansion and reduction of production scale, and even production change, are all achievable, and the supply quantity can fully respond to price changes, so the supply elasticity is relatively large.

2. The sensitivity of production cost per unit product to output

If the production cost of a unit product is very sensitive to the output, the supply side will not easily adjust the output, so the supply elasticity is small; otherwise, the supply elasticity is relatively large.

3. Product production cycle

In a certain period of time, for products with a short production cycle, the supply side can adjust the output in time according to changes in market prices, and the supply elasticity is relatively large. On the contrary, the supply elasticity of products with a long production cycle is often small.

In addition, the difficulty of production, the difficulty of changing the scale of production, and the expectation of future prices will also affect the elasticity of supply.

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The price elasticity of supply is conceptually similar to the price elasticity of demand, except that it measures the response of supply to a change in price.Supply elasticity is most useful under conditions of perfect competition.

(End of this chapter)