Supply Elasticity

Return to the bakery. We care not only about the direction of change, but its size relative to the price change. OpenStax therefore uses a ratio of percentage changes. Elasticity has no unit: we are not dividing bread rolls directly by money. This allows comparison of operations of different sizes. The slope of a line on a graph is different and also depends on the axis units. Redrawing the same example from dollars to cents does not change the baker’s willingness to bake. [1]

In our example, price rises from 10 to 12 and the quantity offered from 100 to 130 items per day. OpenStax describes the midpoint method: divide changes by the average of their old and new values. This gives (30 / 115) / (2 / 11), or about 1.43. Dividing the changes by the original values instead would give 1.5. These are not different bakeries, just different calculation bases. State the method and do not mix its results with the other approach; the first number describes the specified interval. [1]

In the usual model where a higher price does not reduce quantity supplied, OpenStax distinguishes a response above 1, equal to 1 and below 1. Above that boundary, quantity responds proportionally more than price; at equality, equally; below it, less. A value of 0 means quantity does not respond to the price change. This weaker response is called inelastic supply; it does not necessarily mean no response. Nor does a response measured over a particular period determine how many items could ever exist. [1]

The bakery might use spare dough or extend a shift today. It usually cannot bring a new oven into operation within the afternoon. OpenStax explains why expanding production is often easier over a longer period. An elasticity figure therefore needs a time horizon. A day’s response need not describe what happens after a new facility is built. More time still does not prove unlimited supply: materials, workers, equipment and whether production pays remain relevant. [2]

Suppose flour becomes more expensive at the same time. The baker may then offer less bread even at the same selling price. OpenStax calls this a shift of the supply curve: the conditions under which the producer supplies have changed. That differs from responding to bread’s price with other conditions unchanged. Two observed prices and volumes therefore do not isolate price elasticity on their own. First establish whether costs, technology or demand changed between observations. [3]

Bitcoin follows different rules from a bakery. Hashrate is the speed of mining computations. Mining difficulty determines how many calculations are needed, on average, to find a block. An increase in hashrate can temporarily speed up blocks; the Bitcoin Developer Guide describes a difficulty adjustment after 2016 blocks that responds to the pace. Higher hashrate does not itself authorize more new coins in each block. The schedule for creating new coins follows block height, each block’s position in the chain, rather than the current market price. When discussing supply, therefore, distinguish computing power, the number of blocks and calendar time. [5]

Bitcoin.org discusses the limited creation of bitcoins (BTC) alongside market supply and demand. The 21 Million rule limits total issuance, not existing holders’ decisions. One person may offer some savings at a higher price; another may keep them in a wallet. Both concern coins that already exist. Total BTC is therefore different from the amount actually available for sale. A fixed issuance rule cannot tell us that sellers offer the same quantity of bitcoin at every price. [4]

Supply Elasticity helps us reason about supply’s response in a given situation. Demand Elasticity examines the other side: how the quantity buyers want responds to price. OpenStax shows that their interaction shapes the market outcome. A coefficient alone therefore determines no future price and guarantees no profit. A useful conclusion names the market, period, method and assumed changes. For Bitcoin, it also states whether it describes issuance or holders’ willingness to sell. [2]