Price Elasticity of Supply

A measure of the responsiveness of the quantity supplied of a good to a change in its price when all other influences on sellers’ plans remain the same A measure of the responsiveness of the quantity supplied of a good to a change in its price when all other influences on sellers’ plans remain the same Determine Price Elasticity of Supply by comparing the % change in the quantity supplied with the % change in price Determine Price Elasticity of Supply by comparing the % change in the quantity supplied with the % change in price

Price Elasticity of Supply Supply might be (like demand): Supply might be (like demand): Elastic Elastic Unit elastic Unit elastic Inelastic Inelastic

Perfectly Elastic Supply An almost zero percentage change in An almost zero percentage change in prices brings a very large percentage change in the quantity supplied

Elastic Supply The percentage change in the The percentage change in the quantity supplied exceeds the exceeds thepercentage change in price

Unit Elastic SUpply The percentage change in the The percentage change in the quantity supplied equals the percentage change in price

Inelastic Supply The percentage change in the The percentage change in the quantity supplied is less than the is less than thepercentage change in price

Perfectly Inelastic Supply The percentage change in the The percentage change in the quantity supplied is zero when the is zero when the price changes

Influences on the Price Elasticity of Supply Two main influences on price elasticity of supply: Two main influences on price elasticity of supply: 1.Production possibilities 2.Storage possibilities

Production Possibilities Good that have an elastic supply can be produced at a constant (or very gently rising) opportunity cost Good that have an elastic supply can be produced at a constant (or very gently rising) opportunity cost Goods that have an inelastic supply are goods that are produced in a fixed quantity Goods that have an inelastic supply are goods that are produced in a fixed quantity

Production Possibilities Time Elapsed Since Price Change – time passes after a price change, it is easier to change production plans and supply becomes more elastic Time Elapsed Since Price Change – time passes after a price change, it is easier to change production plans and supply becomes more elastic Fruits and Vegetables– perfectly inelastic supply on the day of a price change, supply depends on crop planting decisions earlier Fruits and Vegetables– perfectly inelastic supply on the day of a price change, supply depends on crop planting decisions earlier

Production Possibilities Time Elapsed Since Price Change in manufactured goods: Time Elapsed Since Price Change in manufactured goods: Manufactured goods have inelastic supply if production plans have had only a short period to which to change Manufactured goods have inelastic supply if production plans have had only a short period to which to change i.e. PlayStation 2 release by Sony in 2000 i.e. PlayStation 2 release by Sony in 2000

Storage Possibilities Elasticity of supply of a good that cannot be stored or a service depends only on production possibilities Elasticity of supply of a good that cannot be stored or a service depends only on production possibilities BUT…elasticity of supply of a good that can be stored depends on the decision to keep the good in storage or offer it for sale BUT…elasticity of supply of a good that can be stored depends on the decision to keep the good in storage or offer it for sale A small price change can make a big difference so the supply of a storable good is highly elastic A small price change can make a big difference so the supply of a storable good is highly elastic

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

Price Elasticity of Supply Notes

Price Elasticity of Supply Determine Price Elasticity of Supply by comparing the % change in the quantity supplied with the % change in price Determine Price Elasticity of Supply by comparing the % change in the quantity supplied with the % change in price

Price Elasticity of Supply Supply might be (like demand): Supply might be (like demand):

Perfectly Elastic Supply

Elastic Supply

Unit Elastic Supply

Inelastic Supply

Perfectly Inelastic Supply

Influences on the Price Elasticity of Supply Two main influences on price elasticity of supply: Two main influences on price elasticity of supply:

Production Possibilities Good that have an elastic supply can be produced at a constant (or very gently rising) opportunity cost Good that have an elastic supply can be produced at a constant (or very gently rising) opportunity cost Goods that have an inelastic supply are goods that are produced in a fixed quantity Goods that have an inelastic supply are goods that are produced in a fixed quantity

Production Possibilities Time Elapsed Since Price Change – Time Elapsed Since Price Change – Fruits and Vegetables– Fruits and Vegetables–

Production Possibilities Time Elapsed Since Price Change in manufactured goods: Time Elapsed Since Price Change in manufactured goods: Manufactured goods have inelastic supply if production plans have had only a short period to which to change Manufactured goods have inelastic supply if production plans have had only a short period to which to change

Storage Possibilities Elasticity of supply of a good that cannot be stored or a service depends only on production possibilities Elasticity of supply of a good that cannot be stored or a service depends only on production possibilities BUT…elasticity of supply of a good that can be stored depends on the decision to keep the good in storage or offer it for sale BUT…elasticity of supply of a good that can be stored depends on the decision to keep the good in storage or offer it for sale A small price change can make a big difference so the supply of a storable good is highly elastic A small price change can make a big difference so the supply of a storable good is highly elastic

Computing Price Elasticity of Supply If the price elasticity of supply is greater than 1, supply is ___________ If the price elasticity of supply is greater than 1, supply is ___________ If the price elasticity of supply equals 1, supply is ___________ If the price elasticity of supply equals 1, supply is ___________ If the price of elasticity of supply is less than 1, supply is ___________ If the price of elasticity of supply is less than 1, supply is ___________ Price elasticity of supply Percentage change in quantity supplied Percentage change in quantity price =