Price Elasticity of SupplyPrice Elasticity of Supply

Price Elasticity of SupplyPrice Elasticity of Supply

• A measure of the responsiveness of the A measure of the responsiveness of the quantity supplied of a good to a change quantity supplied of a good to a change in its price when all other influences on in its price when all other influences on sellers’ plans remain the samesellers’ plans remain the same

• Determine Price Elasticity of Supply by Determine Price Elasticity of Supply by comparing the % change in the quantity comparing the % change in the quantity supplied with the % change in pricesupplied with the % change in price

Price Elasticity of SupplyPrice Elasticity of Supply

• Supply might be (like Supply might be (like demand):demand):• ElasticElastic• Unit elasticUnit elastic• InelasticInelastic

Perfectly Elastic SupplyPerfectly Elastic Supply• An almost zero percentage change inAn almost zero percentage change inprices brings a prices brings a very large very large percentage percentage change in the change in the quantity suppliedquantity supplied

Elastic SupplyElastic Supply

• The percentage change in theThe percentage change in thequantity suppliedquantity supplied exceeds the exceeds the percentagepercentagechange in pricechange in price

Unit Elastic SUpplyUnit Elastic SUpply

• The percentage change in theThe percentage change in thequantity suppliedquantity suppliedequals the equals the percentage percentage change in pricechange in price

Inelastic SupplyInelastic Supply

• The percentage change in theThe percentage change in thequantity suppliedquantity supplied is less than the is less than the percentagepercentagechange in pricechange in price

Perfectly Inelastic SupplyPerfectly Inelastic Supply

• The percentage change in theThe percentage change in thequantity suppliedquantity supplied is zero when the is zero when the price changesprice changes

Influences on the Price Elasticity Influences on the Price Elasticity of Supplyof Supply

• Two main influences on price Two main influences on price elasticity of supply:elasticity of supply:

1.1.Production possibilitiesProduction possibilities

2.2.Storage possibilitiesStorage possibilities

Production PossibilitiesProduction Possibilities

• Good that have an elastic supply Good that have an elastic supply can be produced at a constant (or can be produced at a constant (or very gently rising) opportunity costvery gently rising) opportunity cost• Goods that have an inelastic supply Goods that have an inelastic supply

are goods that are produced in a are goods that are produced in a fixed quantityfixed quantity

Production PossibilitiesProduction Possibilities

• Time Elapsed Since Price Change Time Elapsed Since Price Change – time – time passes after a price change, it is easier passes after a price change, it is easier to change production plans and supply to change production plans and supply becomes more elasticbecomes more elastic

• Fruits and Vegetables– perfectly Fruits and Vegetables– perfectly inelastic supply on the day of a price inelastic supply on the day of a price change, supply depends on crop change, supply depends on crop planting decisions earlierplanting decisions earlier

Production PossibilitiesProduction Possibilities

• Time Elapsed Since Price Change in Time Elapsed Since Price Change in manufactured goods:manufactured goods:• Manufactured goods have inelastic Manufactured goods have inelastic

supply if production plans have had supply if production plans have had only a short period to which to changeonly a short period to which to change• i.e. PlayStation 2 release by Sony in i.e. PlayStation 2 release by Sony in

20002000

Storage PossibilitiesStorage Possibilities

• Elasticity of supply of a good that cannot Elasticity of supply of a good that cannot be stored or a service depends only on be stored or a service depends only on production possibilitiesproduction possibilities

• BUT…elasticity of supply of a good that BUT…elasticity of supply of a good that can be stored depends on the decision to can be stored depends on the decision to keep the good in storage or offer it for salekeep the good in storage or offer it for sale

• A small price change can make a big A small price change can make a big difference so the supply of a storable good difference so the supply of a storable good is highly elasticis highly elastic

Computing Price Elasticity of Computing Price Elasticity of SupplySupply

• If the price elasticity of supply is greater than If the price elasticity of supply is greater than 1, supply is elastic1, supply is elastic

• If the price elasticity of supply equals 1, If the price elasticity of supply equals 1, supply is unit elasticsupply is unit elastic

• If the price of elasticity of supply is less than If the price of elasticity of supply is less than 1, supply is inelastic1, supply is inelastic

Price elasticity Price elasticity of supplyof supply

Percentage change in quantity suppliedPercentage change in quantity supplied

Percentage change in quantity pricePercentage change in quantity price=

Price Elasticity of Supply Price Elasticity of Supply NotesNotes

Price Elasticity of SupplyPrice Elasticity of Supply

• Determine Price Elasticity of Supply by Determine Price Elasticity of Supply by comparing the % change in the quantity comparing the % change in the quantity supplied with the % change in pricesupplied with the % change in price

Price Elasticity of SupplyPrice Elasticity of Supply

• Supply might be (like Supply might be (like demand):demand):

Perfectly Elastic SupplyPerfectly Elastic Supply

Elastic SupplyElastic Supply

Unit Elastic SupplyUnit Elastic Supply

Inelastic SupplyInelastic Supply

Perfectly Inelastic SupplyPerfectly Inelastic Supply

Influences on the Price Elasticity Influences on the Price Elasticity of Supplyof Supply

• Two main influences on price Two main influences on price elasticity of supply:elasticity of supply:

Production PossibilitiesProduction Possibilities

• Good that have an elastic supply Good that have an elastic supply can be produced at a constant (or can be produced at a constant (or very gently rising) opportunity costvery gently rising) opportunity cost• Goods that have an inelastic supply Goods that have an inelastic supply

are goods that are produced in a are goods that are produced in a fixed quantityfixed quantity

Production PossibilitiesProduction Possibilities

• Time Elapsed Since Price Change Time Elapsed Since Price Change – –

• Fruits and Vegetables– Fruits and Vegetables–

Production PossibilitiesProduction Possibilities

• Time Elapsed Since Price Change in Time Elapsed Since Price Change in manufactured goods:manufactured goods:• Manufactured goods have inelastic Manufactured goods have inelastic

supply if production plans have had supply if production plans have had only a short period to which to only a short period to which to changechange

Storage PossibilitiesStorage Possibilities

• Elasticity of supply of a good that cannot Elasticity of supply of a good that cannot be stored or a service depends only on be stored or a service depends only on production possibilitiesproduction possibilities

• BUT…elasticity of supply of a good that BUT…elasticity of supply of a good that can be stored depends on the decision to can be stored depends on the decision to keep the good in storage or offer it for salekeep the good in storage or offer it for sale

• A small price change can make a big A small price change can make a big difference so the supply of a storable good difference so the supply of a storable good is highly elasticis highly elastic

Computing Price Elasticity of Computing Price Elasticity of SupplySupply

• If the price elasticity of supply is greater than If the price elasticity of supply is greater than 1, supply is ___________1, supply is ___________

• If the price elasticity of supply equals 1, If the price elasticity of supply equals 1, supply is ___________supply is ___________

• If the price of elasticity of supply is less than If the price of elasticity of supply is less than 1, supply is ___________1, supply is ___________

Price elasticity Price elasticity of supplyof supply

Percentage change in quantity suppliedPercentage change in quantity supplied

Percentage change in quantity pricePercentage change in quantity price=