The Law of Supply

The Elasticity of Supply

Supply curves for different products may look very different from one another. Let’s consider the supply curves for two different products – wine and hairdressing. Although one is a good and the other is a service we will still be able to compare them.

The Supply of Wine

Wine is the end result of growing grapes, crushing them and bottling the product to create an alcoholic drink. The final product can be stored for an extended period of time, and as such suppliers may make extra when the harvest is good. This will allow for stocks to be built up, and this in turn will allow for suppliers to be more responsive to a change in price.

As a result, wine may have a relatively elastic supply curve. And elastic demand curve exists when a small change in price will result in a relatively large change in quantity. This can be represented on the supply line as follows:

In this case we can see that the price has increased from $10 to $12 (a 20% increase), while the quantity supplied has increased from 100 units to 900 units (an 800% increase). As the quantity supplied has increased at a faster rate than the price, we would call this a relatively elastic supply curve.

The Supply of Hairdressing

It is also possible to have an inelastic supply curve. This would happen when a large change in price would result in a relatively small change in the quantity supplied. This may occur when resources are difficult to shift – once a supplier is committed to making a particular item it is very difficult for them to change their mind. For example, if a person has been trained as a hairdresser they may not be qualified to do many other jobs. As such if the price offered for hairdressing services fell, while the price of surgery increased, it would be almost impossible for a person to re-allocate their labour resource to surgery in order to maximise their standard of living.

An inelastic supply curve would look like this:

We can see here that the price has fallen by 60% (from $25 to $10), while the impact on the quantity supplied has not been as dramatic – a fall of only 12.5%. As a result, we would call this a relatively inelastic supply curve.

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