Elasticity of Supply

Law of Supply The Law of Supply is a positive curve = a rise in price will cause the quantity supplied to rise. A decrease in price will cause the quantity supplied to fall.

Price Elasticity of Supply A measure of how the changes in quantity supplied reacts to changes in price. Why would sellers/producers need to know this?

Supply is Elastic Quantity supplied (Qs) reacts substantially to changes in Price OR Es > 1 P S Q

Supply is Inelastic Qs reacts only slightly to changes in P OR

Computing Elasticity of Supply Es = %∆ in Qs % ∆ in P OR ∆Q ÷ [(Q1 + Q2)/2] ∆P ÷[(P1 + P2)/2]

Computing Elasticity of Supply Elastic if Es > 1 Inelastic if Es < 1 Unit Elasticity if Es = 1

Problem Solving Scenario: You are a wheat farmer A new method of growing wheat has been discovered at a local agricultural college The new method will raise the amount of wheat farmers can grow on each acre of land by 20%

Problem Solving You must determine, as a producer of wheat, the following: What effect does the new method have on the supply and demand curves of wheat? After the new method takes effect, it is predicted that the supply of wheat will increase from 100,000 bushels per month to 110,000 bushels per month. Assume all bushels will be sold to fulfill consumer demand. After the new method takes effect, it is predicted that the price of wheat will decrease from $3 a bushel to $2 a bushel

Problem Solving You must determine the following: Is the demand for wheat elastic or inelastic? Is the supply for wheat elastic or inelastic? What is the effect on Total Revenue of this new production method? Is the new production method advantageous for farmers or for consumers? Draw a short run supply and demand graph which describes the effects of the new farming method. Include all prices and quantities.