1. Understanding Economics 2nd edition by Mark Lovewell and Khoa Nguyen
Chapter 3
Price Elasticity of Supply
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

2. Elastic and Inelastic Supply
Price elasticity of supply measures the responsiveness of quantity supplied to price changes
elastic supply means % change in quantity supplied is more than % change in price
inelastic supply means % change in quantity supplied is less than % change in price
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3. Elastic and Inelastic Supply Figure 3.7, Page 64
Elastic Supply Curve
for Tomatos
Inelastic Supply Curve
For Tomatos 4 4 S1 S1 3 3
50%
50%
Price ($ per kilogram)
Price ($ per kilogram) 2 2
100%
20% 1 1
500
1000
Quantity Supplied
(kilograms per year)
Quantity Supplied
(kilograms per year)
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4. Perfectly Elastic and Perfectly Inelastic Supply
Perfectly elastic supply means constant price and a horizontal supply curve
Perfectly inelastic supply means constant quantity supplied and a vertical supply curve
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5. Time and the Price Elasticity of Supply (a)
Price elasticity of supply changes over three production periods
supply is perfectly inelastic in the immediate run
supply is either elastic or inelastic in the short run
supply is perfectly elastic for a constant-cost industry and very elastic for an increasing-cost industry in the long run
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6. Time and the Price Elasticity of Supply (b) Figure 3.8, Page 65
Immediate-Run
Supply Elasticity
for Strawberries
Short-Run
Supply Elasticity
For Strawberries S2
2.50 S1
2.00
Price ($ per kilogram)
Price ($ per kilograms) 9 11
Quantity Supplied
(kilograms per month)
Quantity Supplied
(millions kilograms per year)
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7. Time and the Price Elasticity of Supply (c)
If strawberries are produced in a constant-cost industry:
A higher price of strawberries raises production but not resource prices.
As new businesses enter the industry in the long run due to a higher price of strawberries, this price is gradually pushed back down to its original level.
Therefore the long-run supply curve for a constant-cost industry is perfectly elastic.
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

8. Time and the Price Elasticity of Supply (d)
If strawberries are produced in a increasing-cost industry:
A higher price of strawberries raises production and also resource prices.
As new businesses enter the industry in the long run due to a higher price of strawberries, this price is gradually pushed back down to its lowest possible level, but this level is higher than it was originally.
Therefore the long-run supply curve for an increasing-cost industry is very elastic.
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9. Time and the Price Elasticity of Supply (d) Figure 3.8, Page 65
Long-Run Supply Elasticity S4
Constant-
cost Industry
2.00 S3
Increasing-
cost Industry
Price ($ per kilograms)
Quantity Supplied
(millions kilograms per decade)
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10. Calculating Price Elasticity of Supply
A numerical value for price elasticity of supply (es) is found by taking the ratio of the changes in quantity supplied and in price, each divided by its average value.
In mathematical terms:
es = ΔQs ÷ average Qs
Δprice ÷ average price
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

11. Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
Price Controls
A price floor is a minimum price set above the equilibrium price
it results in a surplus in the market
A price ceiling is a maximum price set below the equilibrium price
it results in a shortage in the market
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12. Agricultural Price Supports
Price supports for agricultural goods are an example of a price floor
they help overcome unstable agricultural prices
farmers win from these supports
consumers and taxpayers lose from these supports
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

13. Reasons for Price Supports Figure 3.9, page 68
Market Demand and Supply
Curves for Wheat
Market Demand and Supply
Schedules for Wheat S1 S0
140 b
Price
($ per tonne)
Quantity
Demanded
Quantity
Supplied
120
100 a
(D)
(S0)
(S1) 80
(millions of tonnes)
Price ($ per tonne) 60 D
140
120
100 80 60 10 11 12 13 14 14 13 12 11 10 12 11 10 9 8 40 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Quantity (millions of tonnes per year)
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14. Effects of Price Supports Figure 3.11, page 70
Market Demand and Supply Curves
for Milk
Market Demand and Supply
Schedules for Milk
surplus S
1.30
Price
($ per litre)
Quantity
Demanded
(D)
Quantity
Supplied
(S)
1.10
(millions of litres)
Price ($ per litre)
.90
1.30 59 62
A price floor
creates
a surplus. D
.70
1.10 60 60
.90 61 58 58 59 60 61 62
Quantity
(millions of litres per year)
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15. Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
Rent Controls
Rent controls are an example of a price ceiling
they keep down prices of controlled rental accommodation
some (especially middle-class) tenants win from these controls
other (especially poorer) tenants lose from these controls
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16. Effects of Rent Controls Figure 3.11, page 70
Market Demand and Supply
Curves for Units
Market Demand and Supply
Schedules for Units S
Price
($ rent per month)
Quantity
Demanded
(D)
Quantity
Supplied
(S)
700
A price ceiling
creates
a shortage.
500
(units rented per month)
Price ($ per unit)
300
700
1700
2500
shortage
500
2000
2000 D
300
2300
1500
1500
2000
2300
2500
Quantity
(units rented per month)
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17. Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
Spillover Costs (a)
Spillover costs are the negative external effects of producing or consuming a product
adding these costs to private costs raises the supply curve
the preferred outcome is at a lower quantity than in a perfectly competitive market
government intervention (e.g. an excise tax) can produce the preferred outcome
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

18. Spillover Costs (b) Figure 3.13, page 72
Market Demand Curve for Strawberries
Demand and Supply
Schedules for Gasoline D S0 S1
2.50
Spillover
Costs,
Excise
Tax
Price
($ per kg)
Quantity Demanded
Quantity Supplied a
2.00
(D)
(S0)
(S1)
(millions of litres)
1.50 b
Price ($ per kg)
2.50
2.00
1.50
1.00
0.05 4 5 6 7 8 8 7 6 5 4 6 5 4 3 2
1.00
0.50 1 2 3 4 5 6 7 8
Millions of Litres
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19. Spillover Benefits (a)
Spillover benefits are the positive external effects of producing or consuming a product
adding these benefits to private benefits raises the demand curve
the preferred outcome is at a higher quantity than occurs in a perfectly competitive market
government intervention (e.g. a consumer subsidy) can produce the preferred outcome
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

20. Spillover Benefits (b) Figure 3.14, page 73
Demand and Supply Curves for an
Engineering Education
Demand and Supply Schedules
for an Engineering Education
6000 b
Tuition
($ per year)
Enrollment Demanded
Quantity Supplied
5000
Spillover
Benefits,
Student
Subsidy
(S0)
(S1)
(S)
4000 a
(thousands of students)
6000
5000
4000
3000
2000 8 9 10 11 12 10 11 12 13 14 12 11 10 9 8
3000
Tuition ($ per year)
2000 D1 S D0
1000 8 9 10 11 12 13 14
Thousands of Students
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21. Getting More Than You Bargained For (a)
Alfred Marshall
was the first to establish the use of demand and supply curves
devised the notion of consumer surplus which is the difference between marginal benefit and price for each unit of a product
The notion of consumer surplus applies both to individual consumer and market demand curves:
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

22. Getting More Than You Bargained For (b) Figure A, page 81
Consumer’s Demand Curve for Pizzas
Consumer’s Demand
Schedule for Pizzas 12
A+B = Total Benefit
B = Total expenditure
Price
($ per pizza)
Quantity Demanded
(D)
(pizzas)
Total Benefit
($) 9
A = $9
Price ($ per pizza) 6
12 1
9 2
6 3 12
21 (12 + 9)
27 ( ) D 3
B = $18 1 2 3 4
Quantity (pizzas per week)
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

23. Getting More Than You Bargained For (c) Figure B, page 82
Consumer’s Demand Curve for Pizzas
Market Demand Schedule
for Pizzas 16
A+B = Total Benefit
B = Total Expenditures
Price
($ per pizza)
Quantity Demanded
(D)
(thousands of pizzas) 14 12 10
Price ($ per pizza)
A = $500,000 8
16 0
11 50
6 100 6 D 4
B = $600,000 2 2 4
Quantity (thousands of pizzas)
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

24. The Economic Role of Government
Besides intervening in private markets, Canadian governments have an independent role.
Government programs include payments to adults with children, retirement funds for the elderly, unemployment insurance, welfare, higher education subsidies, free health care and schooling, and subsidized public housing.
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25. Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
Federal Spending
The main federal spending programs are:
transfer payments to seniors (the Seniors Benefit)
tax credits to low-income parents (the Child Tax Credit)
transfer payments to the unemployed (Employment Insurance)
pensions (the Quebec and Canada Pension Plans)
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26. Provincial and Territorial Spending
The responsibilities of provincial and territorial governments include:
health care
subsidies for post-secondary education
welfare services
The federal government pays a portion of these costs through the Canada Health and Social Transfer (CHST).
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27. Government Expenditures Figure A, Page 85
Federal ( )
($ billions)
Provincial (1999
($ billions)
Federal ( )
($ billions)
Transfers to persons
Benefits to the elderly
Employment insurance
benefits
Transfers to other levels
of government
Subsidies and other
transfers
Crown Corporations
Defence
Government operations
Debt charges
23.3
11.7
23.6
20.2
3.8
9.9
23.0
41.5
157.0
Goods and services
Transfers to
Persons
Businesses
Governments
Debt charges
106.3
26.9
5.3
32.1
27.5
198.1
Goods and services
Transfers to
Persons
Businesses
Provinces
Debt Charges
63.9
4.0
1.5
0.3
3.8
73.5
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28. Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
Taxation (a)
Canadian governments use five main types of taxation:
Personal income taxes are levied by both federal and provincial governments, and are based on four marginal federal tax rates (16%, 22%, 26%, and 29%).
Sales taxes are levied by both federal and provincial governments, and are charged as a percentage of price on a wide range of products.
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

29. Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
Taxation (b)
Excise taxes are levied by both federal and provincial governments, and are usually charged as a dollar amount per unit of quantity on particular products.
Property taxes are charged by local governments on buildings and land.
Corporate income taxes are paid by corporations to both federal and provincial governments as a percentage of annual profits.
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30. Tax Revenues for All Levels of Government Figure B, Page 86
Percent of
Gross Domestic Product
14.3
5.5
3.5
3.2
10.9
37.4
Percent of
Total Taxes
38.2
14.7
9.4
8.6
29.1
100.0
Personal income taxes
Sales and excise taxes
Property taxes
Corporate income taxes
Miscellaneous taxes
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31. Government Taxes and the Canadian Economy Figure C, Page 87
1926
1930
1940
1950
1960
1970
1980
1990
2000 10 20 30 40
Taxes as a Percentage
Of GDP (%)
Year
Local
Provincial
Federal
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32. Debates over Government’s Role (a)
Taxes have increased significantly as a proportion of the total Canadian economy over the past few decades.
Critics argue that taxes and some spending programs reduce productive activity.
Critics also contend that many government programs are inequitable, and hampered by high administrative problems.
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33. Debates Over Government’s Role (b)
Supporters of government admit that public spending and taxation are not as effective as they could be. But they argue that these problems need to be seen in perspective, given that private markets are also subject to a variety of flaws.
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34. Understanding Economics 2nd edition by Mark Lovewell
Chapter 3
The End
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.