Elasticity of Supply. Supply Elasticity Supply elasticity is essentially the same as demand elasticity. If supply is elastic, a price increase usually.

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Presentation transcript:

Elasticity of Supply

Supply Elasticity Supply elasticity is essentially the same as demand elasticity. If supply is elastic, a price increase usually leads to a significant increase in quantity supplied. If supply is inelastic, a price increase usually leads to a barely noticeable increase in quantity supplied.

How to Estimate Supply Elasticity The supply for MOST products is elastic. If the supply for a product cannot easily be increased, it is inelastic. Examples of inelastic supply: –Parking spaces in downtown Denver –Broncos tickets

How to Calculate Supply Elasticity Elastic: (high quantity ÷ low quantity) > (high price ÷ low price) Inelastic: (high quantity ÷ low quantity) < (high price ÷ low price) Unit elastic: (high quantity ÷ low quantity) = (high price ÷ low price) Reminders: –Always divide high by low. –Always put quantity before price.

Examples (Using Handout 3A) 1. Between $30 and $27, is the supply elastic, inelastic, or unit elastic? –Compare 350 ÷ 330 to $30 ÷ $27. (Compare high quantity ÷ low quantity to high price ÷ low price.) –350 ÷ 330 = 1.06; $30 ÷ $27 = 1.11 –1.06 < 1.11 –Therefore, supply is INELASTIC.

Examples, cont. 2. Between $12 and $9, is the supply elastic, inelastic, or unit elastic? –Compare 70 ÷ 20 to $12 ÷ $9. –70 ÷ 20 = 3.5; $12 ÷ $9 = 1.33 –3.5 > 1.33 –Therefore, supply is ELASTIC.

Effect of Supply Elasticity on Price Supply elasticity will affect the degree of the price change WHEN THERE IS A CHANGE IN DEMAND. –If supply is elastic, the price will not change much. –If supply is inelastic, the price will change significantly.

Increase in Demand When Supply is Elastic D1 S D2 Original equilibrium New equilibrium

Increase in Demand When Supply is Inelastic D1S D2 Original equilibrium New equilibrium