AS Economics Mr. Durham durham.j@shishialevel.cn http://durham-asecon.wikispaces.com

By the end of this lesson, students should be able to: Lesson Objectives By the end of this lesson, students should be able to: Define the Price Elasticity of Supply (PES) Calculate the PES Interpret the PES Identify the influences on PES

THE PRICE ELASTICITY OF SUPPLY Price elasticity of supply is a measure of the extent to which the quantity supplied of a good changes when the price of the good changes. To determine the price elasticity of supply, we compare the percentage change in the quantity supplied with the percentage change in price. Elasticity is a subject that can overwhelm students by the many details. Be sure to stress the common features of all the different elasticities. All elasticities measure how strongly people respond to a change in some factor; all elasticities use percentage changes; and all elasticities divide the percentage change in the quantity by the percentage change in the relevant factor. Of these features, the most important is the fact that elasticities measure responsiveness. Stress this fact and your students will find it significantly easier to comprehend all the myriad details.

THE PRICE ELASTICITY OF SUPPLY Elastic and Inelastic Supply Supply is perfectly elastic if an almost zero percentage change in price brings a very large percentage change in the quantity supplied. Supply is elastic if the percentage change in the quantity supplied exceeds the percentage change in price.

THE PRICE ELASTICITY OF SUPPLY Supply is unit elastic if the percentage change in the quantity supplied equals the percentage change in price. Supply is inelastic if the percentage change in the quantity supplied is less than the percentage change in price. Supply is perfectly inelastic if the percentage change in the quantity supplied is zero when the price changes.

THE PRICE ELASTICITY OF SUPPLY Figure 5.5(a) shows perfectly elastic supply. 1. A small rise in the price, 2. Increases the quantity supplied by a very large amount, 3. Supply is perfectly elastic.

THE PRICE ELASTICITY OF SUPPLY Figure 5.5(b) shows an elastic supply. 1. A 10% rise in the price of a book, 2. Increases the quantity of books supplied by 20%. 3. The supply of books is elastic.

THE PRICE ELASTICITY OF SUPPLY Figure 5.5(c) shows a unit elastic supply. 1. A 10% rise in the price of fish, 2. Increases the quantity of fish supplied by 10%. 3. The supply of fish is unit elastic.

THE PRICE ELASTICITY OF SUPPLY Figure 5.5(d) shows an inelastic supply. 1. A 20% rise in the price of a hotel room, 2. Increases the quantity of hotel rooms supplied by 10%. 3. The supply of hotel rooms is inelastic.

THE PRICE ELASTICITY OF SUPPLY Figure 5.5(e) shows a perfectly inelastic supply. 1. A small rise in the price of a beachfront lot, 2. The quantity of beachfront lots supplied increases by 0%. 3. The supply of beachfront lots is perfectly inelastic.

THE PRICE ELASTICITY OF SUPPLY Influences on the Price Elasticity of Supply Time Scale Spare Capacity Level of Stocks How Substitutable Factors are Barriers to entry to the market

THE PRICE ELASTICITY OF SUPPLY Influences on the Price Elasticity of Supply Time Scale In the SR, supply is more price inelastic, because producers cannot quickly increase supply Spare Capacity If the firm is operating at full capacity, there is no space left to increase supply. If there are spare resources (spare capacity), supply can be increased quickly

THE PRICE ELASTICITY OF SUPPLY Influences on the Price Elasticity of Supply Level of Stocks If goods can be stored, such as stocks, firms can stock them and increase market supply easily (in response to a change in price). Storable = More elastic supply How Substitutable Factors are If labour and capital are mobile, supply is more price elastic because resources can be reallocated to producing a good where extra supply is needed

THE PRICE ELASTICITY OF SUPPLY Influences on the Price Elasticity of Supply Barriers to entry to the market High barriers to entry into a market means the supply is more price inelastic, because it is difficult for new firms to enter and supply the market.

THE PRICE ELASTICITY OF SUPPLY Time Elapsed Since Price Change As time passes after a price change, producers find it easier to change their production plans, so supply becomes more elastic. Storage Possibilities The supply of a storable good is highly elastic. The cost of storage is the main influence on the elasticity of supply of a storable good.

THE PRICE ELASTICITY OF SUPPLY Computing the Price Elasticity of Supply Price elasticity of supply Percentage change in quantity supplied Percentage change in quantity price = If the price elasticity of supply is greater than 1, supply is elastic. If the price elasticity of supply equals 1, supply is unit elastic. If the price elasticity of supply is less than 1, supply is inelastic.

THE PRICE ELASTICITY OF SUPPLY Figure 5.6 shows how to calculate the price elasticity of supply. Percentage change in the price equals $60/$40 × 100, or 66.67%. Percentage change in the quantity equals 18 bouquets/15 bouquets × 100, or 120%.

THE PRICE ELASTICITY OF SUPPLY The price elasticity of supply equals the Percentage change in the quantity ÷ Percentage change in the price. The price elasticity of supply equals 120% ÷ 66.67%. The price elasticity of supply is 1.8.

Handout Activity with review Elasticity Questions Homework Handout Activity with review Elasticity Questions Bring to class tomorrow So I can record completion