What is Inelastic Supply?

//What is Inelastic Supply?
What is Inelastic Supply? 2017-10-05T02:52:21+00:00

Definition: Inelastic supply is an economic environment where the quantity producers are willing to produce does not change as the price of goods increases or decreases.

What Does Inelastic Supply Mean?

What is the definition of inelastic supply? This occurs when the percentage change in the quantity supplied is less than the percentage change in the price of the good, and, therefore, the absolute value of the coefficient is less than 1.

In most markets, a key determinant of the elasticity of supply is the investigated time horizon. The supply is usually elastic in the long-term, and inelastic in the short-term. This happens because, in the short term, companies cannot adjust their plants to produce a higher quantity of goods in less time. Hence, in the short-term, the quantity supplied is not sensitive to price changes.

Conversely, over longer periods, companies can build and put into operation new factories or close old ones, and adjust the quantity supplied accordingly. Furthermore, new businesses can enter the market, and the quantity supplied can substantially correspond to the price in the long run.

Let’s look at an example.

Example

Company ABC is a small manufacturing firm that operates at full capacity to produce the number of goods required to meet customer demand. However, by operating at full capacity, the firm faces a problem in increasing the quantity supplied, and it will need to hire more workers to work overtime. Yet, again, by not meeting customer demand, the firm will face capital restrictions and, in turn, it will fail to increase supply without raising additional capital.

Another problem may be the raw materials. By operating at full capacity, the firm will run out of raw materials, such oil, gas, and water, and it will be impossible to replace them in the short run.

When the supply is inelastic, the firm can increase the price of its products because the harder a product is to find in the market, the costlier will be when available. In addition, an inelastic supply in the short-term requires the firm to implement a forward planning strategy to anticipate future demand.

Summary Definition

Define Inelastic Supply: Inelastic supply means producers are willing to make products at the same rate regardless of the market price consumers are willing to pay.