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I am trying the answer the question:

If a good is produced using inputs for which there are no substitutes, the good's

  • A. Elasticity of supply is likely to be small
  • B. Elasticity of supply is likely to be large
  • C. Elasticity for demand will be small
  • D. Elasticity of demand will be large

I am unsure of the correct answer. I don't think it would be (C) or (D) as the question notes that what goes into the good is likely substitutes, not the good itself. That leaves (A) and (B) I don't however see how these would effect the elasticity of supply. Elasticity of supply is defined as % change in quantity supplied divided by % change in price. I am failing to see how the price of a substitute would affect what is in the numerator or denominator. How is the quantity supplied of a product and the price at which it is sold dependent on the fact the substitutes are unavailable? Producers could adjust either quantity or price in order to make up for the substitute-less good. I would greatly appreciate some insight.

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Consider the extreme case: all available quantity of the no-substitute input is already employed.

To trace the supply function, let's assume that we are already at some price level, and let's increase the price of the final good: will quantity supplied increase? No, because it cannot do so -there is no available additional input to use for this increase. In this extreme case the price elasticity of supply of the final good is zero, due to the situation in the inputs market.

Assume now that a little quantity of the no-substitute input is still unemployed. Being unique, we expect that it will command a high price if it is demanded for employment. So increasing quantity supplied of the final good, bears a high cost in terms of steeply increasing production costs. In this case, the price elasticity of supply of the final good is not zero, but "small"...

...compared to the case where the inputs needed for production are generally available and so the cost to employ them is smaller than in the previous case. Here we expect that under the same as before final-good price increase, final-good suppliers will find it profitable to increase their quantity supplied more than in the former case -so here the price elasticity of supply of the final good will be "large"(er).

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  • $\begingroup$ The scenarios you provided made me understand the concept. Thank you very much! $\endgroup$ – Blakeasd Oct 6 '15 at 1:39
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First, think about the elasticity of supply as being the additional amount that suppliers are willing to produce for a given change in price. Elasticity is high when suppliers are willing to produce a lot more for a small change in price, and it's low when suppliers produce only a little more even when prices increase by a lot. We can, of course, invert this, and say that elasticity is high when the price has to increase only a little to convince suppliers to make an additional unit, and low when the price has to increase a lot to convince suppliers to make an additional unit.

The question is about a good that is produced using inputs for which there are no substitutes. So in this question, there are firms that are suppliers of a good, and those firms are also demanders of a substitute-less input that is used to make that good. So for each additional unit of the good that is produced, the supplier must buy some additional amount of inputs.

Now let's think about those inputs. Consider two cases, one in which a good has substitutes, and one in which it does not. Comparing those two cases: when demand increases, does the price of the input rise more or less when there are substitutes for that good, as compared to when there are no substitutes? Now, take your answer from that and ask yourself— what impact would this have on a supplier's willingness to produce an additional unit of a good, given that this means increasing one's demand for the input? What does this say about the elasticity of supply?

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