1. Elasticity of Supply

2. 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.

3. 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

4. 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.

5. 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.

6. 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.

7. 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.

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

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