Copyright eStudy.us 2010 michael.roberson@eStudy.us Elasticity – describes responsiveness, or sensitivity, to a change in price Price Elasticity of Supply - The ratio of the percentage change in the quantity supplied of a product to the percentage change in its price Illustration - Supposing a university’s enrollment drops by 20% because tuition rises by 10%, what is the price elasticity of demand? Elastic Supply (Es > 1) – the percentage change in quantity supplied is greater than the percentage change in price Inelastic Supply (Ed < 1) – the percentage change in quantity supplied is less than the percentage change in price Unit Elastic Supply (Es = 1) – the percentage change in quantity supplied is equal to the percentage change in price Perfectly elastic (Es =∞) – A condition in which a small percentage change in price brings about an infinite percentage change in the quantity supplied Perfectly Inelastic (Es=0) – A condition in which the quantity supplied does not change as the price changes Who pays the tax levied on sellers of goods such as gasoline, cigarettes, and alcoholic beverages? It all depends; the corporation pays all, some, or very little of the tax What decides who pays what part of the tax increase? What decides who pays what part of the tax increase? Illustration – $0.50 increase in sales tax; reduces Q from 35 to 30. Buyers and Sellers each pay $0.25 of tax Illustration – $0.50 increase in sales tax; Q remains 30. Buyers pay all the tax because demand is perfectly inelastic (Example Gasoline tax) Price S1 Price Gasoline Market $3.00 Buyer Pays S0 $3.00 S0 S1 $2.50 D0 $2.50 $2.00 $2.00 $1.50 Seller Pays $1.50 $1.00 $1.00 $0.50 D0 $0.50 10 20 30 40 50 60 Q 10 20 30 40 50 60 Q Demand reaction to media Hurricane Katrina reduced supply Factors Influence Supply Sensitivity The only real determinant of the elasticity of supply is the amount of time sellers have to respond to the price change. D1 D0 S0 D0 S1 S0 Elastic Inelastic Copyright eStudy.us 2010 michael.roberson@eStudy.us