Supply of Goods and Services

Think about what happens when there is an increase in prices. Do producers respond instantly or over time? In this section, you will explore the elasticity of supply, which shows how the quantity supplied responds to changes in the price of the commodity.

You will learn how to measure it, what influences it and why it is such a useful tool for making smart economic decisions. You are stepping in with strong background knowledge! Earlier, you learnt what supply means, the different types and the law of supply, understanding how price influences quantity supplied. Later on, you explored what causes supply to shift and how to distinguish between a movement along the supply curve and a shift of the curve. You will learn how supply behaves when there is a change in market prices and why this matters for producers, planners and the economy as a whole.

KEY IDEAS

• Elasticity of supply measures how much and how quickly producers change the quantity supplied when market prices rise or fall.

• Supply elasticity depends on factors like time, production flexibility and resource availability, which determine how easily output can be adjusted.

• Supply elasticity is calculated by dividing the percentage change in quantity supplied by the percentage change in price.

• Understanding supply elasticity helps businesses make informed decisions about production, pricing and how to handle market changes.

Elasticity of supply refers to the responsiveness of the quantity supplied of a good or service to a change in its price, assuming all other factors remain constant (ceteris paribus).

Elasticity of supply shows how quickly and easily producers can change the amount of a good or service they offer for sale when the price changes.

For example, some Ghanaian farmers can plant more crops quickly when prices rise like watermelon which grows fast and produces fruit in a few months, but others, like cocoa farmers, take years to increase supply because cocoa trees take years to mature and produce pods that can be harvested.

Types of Elasticity of Supply

There are five main types of price elasticity of supply

1. Elastic Supply (PES > 1) Supply is elastic when a small change in price leads to a bigger change in quantity supplied. The coefficient of elasticity is greater than one but less than infinity.

For example, if the price of maize increases by 10%, farmers in Ghana may increase their supply by more than 10% in the next season by planting more.

2. Inelastic Supply (PES < 1) Supply is inelastic when the change in quantity supplied is smaller than the change in price. This means that a proportionate change in price leads to a less than proportionate change in quantity supplied. The coefficient of elasticity is greater than zero but less than one. For example, the supply of gold in Obuasi is inelastic in the short run. Even if the gold price increases, the supply of it may increase in a smaller proportion.

3. Unitary Elastic Supply (PES = 1) Supply is unitary elastic when the percentage change in quantity supplied is the same as the percentage change in price. The coefficient of elasticity is equal to one.

For example, the price of maize in Ghana increased by 5% and farmers increased the supply by 5%. The supply is therefore unitary elastic.

4. Perfectly Elastic Supply (PES = ∞) Supply is perfectly elastic when suppliers are willing to supply any amount of goods at a specific price. The coefficient of elasticity is equal to infinity. For example, in areas like Kumasi, mobile money vendors may offer unlimited cash-out services at a fixed charge but will not provide the service at a lower charge due to competition and cost problems.

5. Perfectly Inelastic Supply (PES = 0) Supply is perfectly inelastic when the quantity supplied does not change, no matter the price. For example, the supply of land is perfectly inelastic because even if price of land increase, the physical quantity of land cannot be increased.

Summary of Graphs to show price elasticity of supply From article Microeconomics – Elasticity and Its Application

Activity 4.1 Revision on Supply - Freeman’s Tomato Farm Purpose: The purpose of this activity is to help you recall and apply key supply concepts through a simple farming scenario.

Duration: 40 minutes Group Size: Individual work, Group research (4-5 members) Materials needed: Notebook, Pen Instructions

Step 1: (15 minutes) Read the Scenario carefully and answer the questions individually. (10 minutes) Scenario: Freeman’s Tomato Farm Freeman owns a small tomato farm in the Volta Region. When tomato prices were GH₵2 per kg, he supplied 100kg to the market weekly. When prices rose to GH₵4 per kg, he increased his supply to 200kg weekly.

Recently, the government provided free fertilisers to farmers and Freeman’s production capacity increased. However, during the rainy season, some of his tomatoes got spoiled, reducing his ability to supply. Freeman noticed that the price of pepper (which he also grows) increases so he grows less tomatoes and more pepper.

Questions: Write a one-word or one-sentence answer to the questions below.

1. What does supply mean? _________________________________(One sentence)

2. What is Freeman’s supply when the price is GH₵2? _________ kg

3. What is Freeman’s supply when the price is GH₵4? _________ kg

4. Is this an increase or a decrease in quantity supplied? ___________ (One word)

5. Free fertilisers cause an ________ in supply. (One word)

6. Spoiled tomatoes cause a ________ in supply. (One word)

7. Pepper is a _____ product for Freeman’s tomato farm space. (One word)

8. The law of supply states, as price increases, quantity supplied ________.

(One word)

Step 2: Compare your answers with a friend and make the appropriate corrections on your work in your notebook. (5 minutes)

Step 3: Elasticity of Supply Research (20 minutes) In your groups, research and discuss the following (you can consult the internet or your Learner Material)

a. Meaning of Elasticity of supply (3 minutes)

b. How does elasticity of supply differ from elasticity of demand? (5 minutes)

c. Identify and explain the types of elasticity of supply (10 minutes)

i. Perfectly elastic supply

ii. Perfectly inelastic supply

iii. Relatively elastic supply

iv. Relatively inelastic supply

v. Unitary elastic supply

Step 4: Share your findings with another group (5 minutes)

Price Elasticity of Supply (PES)

Price Elasticity of Supply (PES) measures how responsive the quantity supplied of a good or service is to a change in its price, assuming all other factors remain constant (ceteris paribus).

Formula for Price Elasticity of Supply (PES)

Percentage change in Quantity Supplied Percentage change in Price PES= This can also be written as:

New Price-Old Price

New Quantity Supplied-Old Quantity Supplied

Old Price

Old Quantity Supplied

PES= ( ) ×100 ) ×100( Simplified version: ΔQ/Q ΔP/P PES= Where:

ΔQ = Change in quantity supplied Q = Original quantity supplied ΔP = Change in price P = Original price

Example

Consider the Scenario below:

A rice farmer in the Volta Region used to supply 400 bags of rice when the price was GH₵150per bag. After the price increased to GH₵170, he increased the supply to 480 bags.

Solution

Step 1: Identify the figures Old Quantity (Q₁) = 400 New Quantity (Q₂) = 480 Old Price (P₁) = GH₵150 New Price (P₂) = GH₵170

Step 2: Calculate the percentage change in quantity supplied 480 - 400 400 ) ×100=20%(

Step 3: Calculate the percentage change in price 170-150 150 ) ×100=13.33%(

Step 4: Apply the formula PES = 20% ÷ 13.33% =1 .50 Interpretation of PES Value PES > 1: Supply is elastic (producers respond quickly to price changes) PES = 1: Supply is unitary elastic (balanced response) PES < 1: Supply is inelastic (producers respond slowly) PES = 0: Supply is perfectly inelastic (no response at all) PES = ∞: Supply is perfectly elastic (unrealistic but used for theory) In our example, PES = 1.50, which means supply is relatively elastic; the rice farmer was quite responsive to the price increase.

Example 2

The production of bags of cement by GHACEM increased by 40% from 500 bags when the price increased by 70% from GH₵100 per bag. Calculate:

a. New quantity supplied

b. New price of the commodity

c. Price elasticity of supply

Solution

Old quantity(Q₁) =500 bags Old price(P₁) = GH₵100

a. New quantity(Q₂) = 40 100 ×500 = 200bags Therefore, Q₂=200 +500 = 700 bags

b. New Price (P₂) = 70 100 ×100 = GH₵70 P₂ = 70 + 100= GH₵170

c. PES = 40% ÷ 70%= 0.57 Since PES is less than one, the supply is relatively inelastic.

Activity 4.2 Calculating Price Elasticity of Supply

Purpose: The purpose of this activity is to help you learn and practice calculating the price elasticity of supply through group problem-solving.

Group Size: 4-5 learners per group Materials needed: Notebook, Pen, Calculator (if available) Instructions

Step 1: Group Formation

Form groups of 4-5 learners

Step 2: Formula & Calculation Work together to solve this problem:

Given Data:

• Price increases from GH₵10 to GH₵12

• Quantity supplied increases from 100 to 140 units Tasks/Question:

a. Write the PES formula

b. Calculate the answer step by step

c. Classify the elasticity type

Step 3: Group Sharing

Each group shares its answer and classification with another group

Step 4: Class Review

Confirm the correct answers and note them in your book.

Another way to calculate price elasticity of supply is using the mid-point formula (see section 1 where this formula is applied to price elasticity of demand) .

Unlike the percentage change method above, the mid-point method accounts for variations in starting values and gives more accurate elasticity estimates, especially when changes are large. The mid-point formula is given as:

[(Q₂-Q₁)/(Q₁+Q₂)/2] [(p₂-p₁)/(p₁+p₂)/2] PES = Where Q1 and Q2 = original and new quantities supplied P1 and P2 = original and new prices

The factors that influence the elasticity of supply are:

1. Time Period

The more time producers have, the easier it is to increase supply. In the short run, supply is usually fixed and inelastic. In the long run, producers can adjust and expand output whenever there is a change in price, so supply becomes elastic. For example, in the long run, Ghana can build new power stations like the Bui Dam to produce more electricity but in the short run, the supply of power becomes inelastic.

2. Spare Capacity

If a firm has extra unused resources (spare capacity), it can easily increase production when prices increase. This makes supply elastic. For example, a bakery in Kumasi with extra unused ovens can bake more bread during festive seasons when the price of bread increases.

3. Availability of Stocks (Inventory)

If firms keep stock (extra goods), they can respond quickly to price changes. For

example, cocoa farmers with warehouses full of stock of cocoa beans can sell more when prices increase. This shows that supply is elastic. Again, retailers in Makola Market can quickly increase supply if they have goods in stock whenever prices increase.

4. Ease of Factor Substitution

If it is easy to switch between workers and machines or raw materials in production, supply is more elastic. For example, a cassava processing plant in the Volta Region can switch from yam to cassava based on availability. This increases supply whenever there is increase in price. Supply, therefore, becomes elastic.

5. Mobility of Factors of Production

If workers, machines or resources can move easily from one use to another, supply is more elastic. For example, mobile money agents can quickly increase in number because they need little training or capital. Therefore, the supply of the services of mobile money agents is elastic.

6. Time Needed for Production

The longer it takes to produce a good, the harder it is to quickly increase supply. This means that the supply of such goods is inelastic in the short run. For example, timber supply is inelastic because trees take years to grow. However, maize from farms in Ejura takes a few months to mature, so supply is relatively elastic.

Importance of Price Elasticity of Supply

₁. Price Stability When supply is elastic, prices do not change too much because producers can quickly increase supply when demand increases. This helps to keep prices stable. For example, imported goods like rice and tin tomatoes can be brought in quickly when demand rises, therefore prices stay stable. However, local fruits like mangoes and oranges have inelastic supply because they are seasonal. This causes prices to increase during off- seasons leading to price instability.

2. Producer Revenue

Elasticity helps producers know how price changes will affect their total revenue. If supply is inelastic, higher prices usually mean higher revenue. For example, cocoa farmers in Ghana earn more when world cocoa prices increase, even if supply does not increase. Sachet water producers may earn more revenue by increasing supply since supply is elastic.

3. Government Policy

The government uses the concept of elasticity to make better decisions about farming, trade and other sectors. For example, fertiliser subsidy programmes offered by the government will increase food crop production quickly when prices go up. This will increase supply and stabilise prices.

4. Business Planning

Firms use the understanding of elasticity to prepare for demand changes and decide how much to produce. For example, Coca-Cola company limited may prepare for high demand during events or hot seasons by increasing output.

Activity 4.3 Factors of Elasticity of Supply’ and ‘Importance of PES Purpose: The purpose of this activity is to help you identify factors that affect the elasticity of supply and apply them to real-world examples.

Group Size: 4-5 learners per group Materials needed: Notebook, Pen, Paper, Manila card/large paper Instructions: This activity is in 2 parts (Part A and Part B) Part A:

Step 1: Group Formation

Form groups of 4-5 learners

Step 2: Read the scenario carefully and identify the factors that influence supply Benjamin’s Bread Business Benjamin owns a small bakery in Mangoase. When bread prices increased, he wanted to bake more but he faced some challenges. His old oven was too small and he couldn’t afford a bigger one immediately. Fresh bread goes bad quickly, so he can’t store much. The government reduced taxes on flour, making production cheaper. More bakeries opened nearby, increasing competition. He bought a new mixing machine that speeds up production. During the rainy season, flour deliveries were delayed, affecting his supply.

Using your notebook, work together as a group to

a. List the main factors that affect the elasticity of supply.

b. Explain each factor briefly.

Step 3: Real-Life Examples

Give 1 example of goods/services for each factor you have identified.

E.g., Technology - handmade crafts vs factory goods Part 2:

Instructions

Step 1: Maintain your groups

Step 2: Poster Design

Create a poster titled “Why Elasticity of Supply Matters.”

Include:

a. Definition of elasticity of supply

b. Three main reasons why the elasticity of supply is important

c. One short example for each reason in (b) above

Step 3: Poster Presentation

Display posters around the classroom wall for viewing by all groups.