So now let's discuss how elasticity relates to supply curves. So up to now, we've been doing a lot of demand curve stuff, but now let's talk about price elasticity of supply and guess what? Pretty much everything we do is going to be exactly the same. So lucky us, we're still going to be using our midpoint method here. Except now we're talking about supply, right? So the idea here is that instead of having quantity demanded in the numerator, so look at our formula, right? We've got quantity supplied in the numerator, but we still got price in the denominator, right? It's called price elasticity of supply, price in the denominator, right? So this is how does quantity supplied respond to a change in price, right? How much is that quantity supplied going to change? Is it going to change a lot when the price goes up? Is it only going to change a little when the price goes up? Right. So we've got our same shorthand that we've been using here. On the right, percentage change in quantity supplied over percentage change in price, right? So really our steps here are going to be the same as price elasticity of demand, except now we're just using quantity supplied. Again, just like with price elasticity of demand, our positives and negatives don't matter in this case because we're always going to get a positive number with quantity supplied, right? Remember the law of supply, when price goes up, quantity supplied goes up. So they're both positive, we're always going to get a positive number, signs don't matter. So let's go ahead and do an example here where we're going to calculate price elasticity of supply and it should seem very familiar to you, in the steps we're doing. So when the price of ice cream rises from $4 a tub to $6 a tub, the quantity supplied increases from $90,000 to $110,000. What is the price elasticity of supply of ice cream? So we are just going to use our 5 steps. There's no 6th step about positive or negative here because it's always positive. Easy peasy. Let's go ahead and do it. So I'm going to go ahead and circle my quantities here in blue like we've been doing and our prices in green, keep everything nice and separate. So I'm going to have a column here for quantity supplied right, not quantity demanded this time, and a column for price. So let's start with step 1, where we're going to subtract the 2 quantities, subtract the 2 prices. Do it the easy way, bigger minus smaller because signs don't matter. Alright. 20,000 is our difference. Price, 6 minus 4, 2. Alright. Step 2, we're going to add. Isn't this nice how similar all of our calculations have become? 110 plus 90 is going to give us 200,000 and price we've got 6 plus 4 equals 10. Step 3, we're just going to divide by 2. Our answer from step 2. Right? 200,000 divided by 2, 100,000, and 10 divided by 2 equals 5. Step 4 is where we're actually going to get our percentage changes in each. So for quantity supplied, it's step 1 divided by step 3. 20,000 divided by 100,000, that's going to give us 0.2, is our percentage change in quantity supplied in this case, right? And let's do the same thing with price. We've got step 1 was 2, step 3 was 5, 2/5 is 0.4. So a 40% change in price and a 20% change in quantity supplied. Step 5, that's just where we're going to plug it into our actual equation of quantity supplied divided by price here. So we're going to get 0.2 divided by 0.4, which is going to give us half here. Right. 0.5 is our answer. We don't have to worry about signs, positive or negative doesn't matter. That is going to be our answer, but now how do we analyze this? Guess what? It's the same as before. This is going to be inelastic, right? We got a number less than 1, it's going to be inelastic. Our supply is inelastic at this point. The quantity supplied rose less in percentage than the price, right? The price rose 40% here, but the quantity supplied only increased by 20%. It's inelastic. So we've got our same kind of summary down here, which is the same as we should remember where it's going to be elastic and in this case, I'm going to put e with a small s, that's elasticity of supply, right? Our price elasticity of supply is greater than 1, that is going to be elastic. Elasticity of supply less than 1, that is going to be inelastic like we got in our problem, and unit-elastic just like before, elasticity of supply equals 1. Cool. It's great how similar all of these calculations have been, right? Alright. Let's go ahead and do a little bit of practice related to price elasticity of supply.
Price Elasticity of Supply: Study with Video Lessons, Practice Problems & Examples
Created using AIYou thought we were gonna forget about supply, huh?
Price Elasticity of Supply
Video transcript
The price elasticity of supply measures the responsiveness of:
If a one percent decrease in the price of a pound of pound cake causes a three percent decrease in the quantity of pound cake supplied:
If a decline in the price of flags $9 to $7, caused by a shift in the demand curve, decreases the quantity of flags supplied from 5,500 to 4,500, the:
Here’s what students ask on this topic:
What is the price elasticity of supply and how is it calculated?
Price elasticity of supply (PES) measures how the quantity supplied of a good responds to changes in its price. It is calculated using the midpoint method, which involves the following steps:
1. Calculate the change in quantity supplied and the change in price.
2. Find the average quantity supplied and the average price.
3. Divide the change in quantity supplied by the average quantity supplied to get the percentage change in quantity supplied.
4. Divide the change in price by the average price to get the percentage change in price.
5. Divide the percentage change in quantity supplied by the percentage change in price.
The formula is:
A value less than 1 indicates inelastic supply, while a value greater than 1 indicates elastic supply.
Created using AIHow does the law of supply relate to price elasticity of supply?
The law of supply states that, all else being equal, an increase in price results in an increase in quantity supplied. Price elasticity of supply (PES) quantifies this relationship by measuring how much the quantity supplied changes in response to a change in price. If PES is greater than 1, supply is elastic, meaning quantity supplied changes significantly with price changes. If PES is less than 1, supply is inelastic, meaning quantity supplied changes little with price changes. This helps businesses and economists understand how responsive producers are to price changes, which is crucial for making production and pricing decisions.
Created using AIWhat factors affect the price elasticity of supply?
Several factors affect the price elasticity of supply (PES):
1. **Time Period**: Supply is more elastic in the long run as producers have more time to adjust production levels.
2. **Availability of Inputs**: If inputs are readily available, supply is more elastic because producers can increase output more easily.
3. **Flexibility of Production**: If a firm can easily switch between different products, supply is more elastic.
4. **Spare Capacity**: Firms with spare capacity can increase production without a significant rise in costs, making supply more elastic.
5. **Storage Ability**: Goods that can be stored easily have more elastic supply because producers can respond to price changes by releasing or withholding stock.
Created using AIWhat is the difference between elastic and inelastic supply?
Elastic supply refers to a situation where the quantity supplied changes significantly in response to price changes. This is indicated by a price elasticity of supply (PES) greater than 1. In contrast, inelastic supply means that the quantity supplied changes very little in response to price changes, indicated by a PES less than 1. For example, if the price of a product increases by 40% and the quantity supplied increases by only 20%, the supply is inelastic. Understanding whether supply is elastic or inelastic helps businesses and policymakers make informed decisions about production and pricing strategies.
Created using AIHow do you interpret the value of price elasticity of supply?
The value of price elasticity of supply (PES) indicates how responsive the quantity supplied is to a change in price:
1. **PES > 1**: Supply is elastic. Quantity supplied changes more than the price change.
2. **PES < 1**: Supply is inelastic. Quantity supplied changes less than the price change.
3. **PES = 1**: Supply is unit elastic. Quantity supplied changes exactly in proportion to the price change.
For example, if PES is 0.5, a 10% increase in price will result in only a 5% increase in quantity supplied, indicating inelastic supply. This helps in understanding how producers might react to price changes.
Created using AI