elasticity of supply

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The ratio of the proportional rise in the quantity of a good supplied to a proportional rise in its price. If q is the quantity supplied and p is price, the elasticity of supply is given byThe concept of an elasticity of supply is only applicable to an industry in which the firms are price-takers: that is, the market sets the price and firms adapt their outputs to it. For any one firm, elasticity of supply will be larger in the long run than in the short run. In the long run more equipment can be installed, and more workers can be taken on and trained, whereas in the short run output can be increased only by taking on more workers who may not be well trained. For the industry, long-run elasticity of supply will depend not only on the elasticity of supply of existing firms, but on entry and exit. Long-run elasticity of supply will be larger, the easier it is for firms to enter the industry as the result of higher prices or to leave as the result of lower prices.

Subjects: Economics.

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