PRICE ELASTIC

ITY OF

SUPPLY

PRICE ELASTICITY OF SUPPLY AND DEMANDLets think about this for a second…

PRICE ELASTICITY OF DEMANDTakes into account the reaction of Consumers to Changes in

Price.

Right?

SO THAT MUST MEAN…. Elasticity of supply takes into account the reaction of

consumers to changes in quantity supplied.

WRONG!!!!!

THE DEFINITIONRecall - The price elasticity of demand measures

the responsiveness of consumers to changes in a products price

• Price Elasticity of Supply or Supply Elasticity measures the responsiveness of producers and the quantity they supply to changes in price.

DON’T BE LIKE MINOR MISTAKE MELVIN!

Never forget:When we talk about Price elasticity of Demand, we measure

consumer reaction to price change.

When we talk about supply elasticity we measure producer reaction to price change.

ELASTIC SUPPLYAs in an elastic demand curve, elastic supply is achieved when

the percentage change in the products price leads to a larger percentage change in it’s quantity supplied.

In simple terms:Quantities that producers are willing to sell are VERY

RESPONSIVE to price changes.

Lets refer to FIGURE 3.7 in your textbook pg. 70

INELASTIC SUPPLYIf the percentage change in price causes a smaller percentage

change in in quantity supplied then we get INELASTIC SUPPLY.

In simple terms:

The quantity of an item that producers are willing to sell is NOT VERY RESPONSIVE when compared to change in price of the item.

FACTORS THAT AFFECT SUPPLY ELASTICITYFirst and foremost:

TIME

THE IMMEDIATE RUN• This is the period during which the businesses in a given

industry are unable to alter the quantities of resources they use.

Refer to text page 71 for the strawberry example.

In the IMMEDIATE RUN, supply is said to be PERFECTLY INELASTIC.

What will the curve look like?

THE SHORT RUN• In this period, the quantity of at least ONE of the resources

used by businesses in a given industry are unable to be varied.

• Refer to page 71 for another strawberry example….

The supply elasticity in the short run could be elastic OR inelastic…

Why?

THE LONG RUN• Over the long run, the quantities of all of the resources used

in an industry can be varied.

• Refer to page 71 for yet ANOTHER strawberry example…• Leads to perfectly Elastic Supply

HOW DO WE CALCULATE IT?Similar to the price elasticity of Demand:

Es = Qs P

Remember, to get percent change we do the following:

NEW QUANT – OLD QUANT / OLD QUANT

NEW PRICE – OLD PRICE / OLD PRICE