(Price) Elasticity of Supply What is elasticity of supply? What are the types of elastic supply? How do you graph the types of elasticity? How do you calculate elasticity? Why do businesses care about elasticity of supply?

What is elasticity of supply? Elasticity is the degree to which a producer will change the quantity supplied in reaction to a change in price –In other words: how strongly suppliers react to a change in price –Will the reaction be large (stretched band), small (very little stretch) or none at all? We calculate elasticity with the following equation:

Calculating Elasticity What does this equation mean? “the % change in quantity supplied (Qs), divided by the % change in price” How do you calculate a percentage change? Original # - New # x 100 original # Another important thing to remember is that percentage changes can be positive or negative, but elasticity is always an absolute value (positive).

A few other quick notes… Elasticity can be roughly compared by looking at the relative steepness or flatness of a curve. It makes sense that the formula for calculating elasticity is similar to the formula used for calculating slope (rise/run)=(quantity/price). Remember to drop any minus signs when finding your final value for elasticity.

Stop and Practice… The table gives part of the supply schedule for PCs. Calculate the price elasticity of supply when the price increases from $900 to $1,100. Step 1: calculate the percentage change of quantity supplied ( ) = (-0.5)=-50% (8000) Step 2: calculate the percentage change of price ( ) = (-0.20)=-20% (900) Step 3: Make the numbers positive, then solve using the equation (.5) = 2.5 (.2) The supply elasticity is equal to 2.5. It is therefore ELASTIC Price of computer Quantity of computers supplied $1,10012,000 $9008,000

Graphing elasticity Graphically, elasticity can be represented by the appearance of the supply curve. If a curve is more elastic, then small changes in price will cause large changes in quantity supplied. –This curve will be close to horizontal

Graphing elasticity If a curve is less elastic (inelastic), then it will take large changes in price to effect a change in quantity supplied. –This curve will tilt more vertically

At the extremes, a perfectly elastic curve will be horizontal –An Elastic curve is flatter, like the horizontal lines in the letter E. a perfectly inelastic curve will be vertical. –an Inelastic curve is more vertical, like the letter I.

What kinds of elasticity exist? 1. Elastic—when the % change in Qs (numerator) is greater than % change in P (denominator) –VALUE IS THEREFORE GREATER THAN ONE (1) 2. Inelastic—when the % change in Qs (numerator) is less than % change in P (denominator) –VALUE IS THEREFORE LESS THAN ONE (1)

3. Unit(ary) elastic—when the % change in Qs (numerator) is equal to the % change in P (denominator) –VALUE IS THEREFORE EQUAL TO ONE (1) –Dividing point between elastic and inelastic demand (where total revenue is maximum)