Recall: 3.1: We looked at how the price elasticity of

demand measures the responsiveness of consumers to a change in a product’s price

Now: 3.2: Price elasticity of supply measures the

responsiveness of producers (and the quantities they supply) to changes in the product’s own price.

3.2 Price Elasticity of Supply

Elastic Supply Supply for which a percentage change in a product’s

price causes a larger percentage change in quantity supplied

Inelastic Supply Supply for which a percentage change in a product’s

price causes a smaller percentage change in quantity supplied

Elastic & Inelastic Supply

Small increase in price leads

to huge increase in

quantity produced.

Large increase in price leads

to small increase in

quantity produced.

*Main* Factor is passage of time. The Immediate Run (e.g. 1 month)

Production period during which none of the resources required to make a product can be varied – supply is perfectly inelastic

The Short Run (e.g. less than 1 growing season for fruit) Production period during which at least one of the

resources required to make a product cannot be varied – elastic or inelastic

The Long Run (e.g. over a decade) Production period during which all resources required to

make a product can be varied and businesses can either enter or leave the industry– supply is perfectly inelastic

Factors That Affect Price Elasticity of Supply

Constant Cost Industry An industry that is not a major user of any single

resource Perfectly Elastic Supply

Supply for which a product’s price remains constant, regardless of quantity supplied

Increasing Cost Industry An industry that is a major user of at least one resource

Definitions

We’ve seen constant cost industries and increasing cost industries – what about decreasing cost industries? Can the amount of resources used to make something decrease over time?Yes! Moore’s Law and the example of Microchips is Moorea perfect example of this.

Moore’s Law states that the processing power of computer chips doubles every 12 months, and it’s been right since 1960, reducing the real price of processing power since the 1960s by 99.9999%.

Decreasing Cost Industry?

Calculating the Price Elasticity of SupplyCase Study: When the price of tomatoes rises from $2 to $3 a

kilogram, the quantity supplied by farmers increases from 100,000 to 200,000 kg. What is the value of the price elasticity of supply for this industry?

Finding that es = 1.67, this means that a certain percentage change in price causes a percentage change in quantity supplied that is 1.67 times as large.

Calculating the Price Elasticity of Supply