Chapter 5:2 Elasticity of supply

Price elasticity of supply

A measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

Flatter

As the elasticity rises, the supply curve gets____

percentage change in quantity supplied/percentage change in price For example, suppose that an increase in the price of milk from $2.85 to $3.15 a gallon raises the amount that dairy farmers produce from 9,000 to 11,000 gallons per month. Using the midpoint method, we calculate the percentage change in price as: 1.(11000-9000)/(11000+9000)/2= .05 2.(3.15-2.85)/(3.15+2.85)/2=.025 Answer: The elasticity of 2 indicates that the quantity supplied changes proportionately twice as much as the price.

Computing the Price Elasticity of Supply

Perfect inelastic supply

Supply for which a products Qs remains constant regardless of price 0 elasticiy

High elasticity

The level of elasticity for low levels of quantity supplied

1. Demand increased, but supply increased at the same time. 2. Demand increased, but supply was perfectly elastic. 3. Supply increased, but demand was perfectly elastic.

The quantity of coffee sold rose sharply last month, while the price remained the same. What are possible suggestions of why?

Perfectly Inelastic Supply (0)

The quantity supplied is the same regardless of the price. ___ elasticity

Perfect elastic supply

Very small changes in the price lead to very large changes in the quantity supplied. The price elasticity of supply approaches infinity

Perfectly Elastic Supply

Very small changes in the price lead to very large changes in the quantity supplied. This occurs as the price elasticity of supply approaches infinity and the supply curve becomes horizontal

The quantity supplied responds more to changes in the price

What does a flatter (more elastic curve) mean?

The flexibility of sellers to change the amount of the good they produce

What does the price elasticity of supply depend on?

If the quantity supplied responds substantially to changes in the price.

When is the supply of a good said to be elastic?

If the quantity supplied responds only slightly to changes in the price.

When is the supply of a good said to be inelastic?

Unit elastic supply

When the percentage change in the quantity supplied equals the percentage change in price

Because firms that produce them can run their factories longer in response to a higher price.

Why are manufactured goods, such as books, cars, and televisions said to be elastic?

Because it is almost impossible to produce more of it

Why is beachfront land said to be inelastic?

In the long run, the quantity supplied can respond substantially to price changes. Over short periods of time, firms cannot easily change the size of their factories to make more or less of a good. In the short run, the quantity supplied is not very responsive to the price. Over longer periods, firms can build new factories or close old ones

Why is elastic supply more efficient in the long run?