02.04 Price Elasticity of Supply

Concept: Elasticity of supply measures how much the quantity supplied of a good or service responds to a change in its price.
Analogy: If a neighbor offers $1 per bag of leaves, you might rake a few. If they offer $50, you'd rake every leaf you could find.
Law of Supply: As price increases, the quantity that producers are willing to supply also increases.
Elasticity's Role: Elasticity explains how much more suppliers will provide for each unit increase in price.

Formula: Identical to the price elasticity of demand formula, but uses the change in quantity supplied (Qs).

Midpoint Formula: Can also be used for elasticity of supply.
Elasticity Coefficient: The result of the above division. It indicates the price elasticity of supply.

Perfect Elasticity and Perfect Inelasticity: Look the same for both supply and demand curves.
Key Difference: The three graphs in the middle (elastic, inelastic, unit elastic) are different for supply and demand because price and quantity supplied have a direct (positive) relationship, whereas price and quantity demanded have an inverse (negative) relationship.

Perfectly Elastic Supply:
- Any price above the line results in suppliers willing to supply an infinite quantity.
- Any price below the line means suppliers won't supply anything (quantity supplied falls to zero).
Perfectly Inelastic Supply: Quantity supplied remains constant regardless of price.

Key Determinants: Input availability and time.
Profit Maximization: Businesses will supply more of a good if they can charge more for another unit, unless the cost of producing that unit exceeds the revenue gained.

Input Market Share: How much of the market for their inputs a good's supplier represents.
- Example: Automakers and palladium. Automakers use a significant portion of the palladium supply, so increased car production affects the price of palladium.
Geography and Transportation: The cost of transporting goods to market (especially relevant for perishable items).
- Example: Tropical fruit suppliers must consider the cost of transporting ripe fruit to market.

Time Constraint: Time is a major constraint on supply elasticity.
Example: If the market price for a handcrafted item increases dramatically, producers are limited by the number of hours they have to produce. Similarly, soybean prices depend on growing time.
Countering Time: Suppliers can add resources to reduce time to market or increase production possibilities.

Toothpicks vs. Laptops: Toothpicks are more elastic. Toothpick suppliers can scale up production more easily due to lower resource costs.
Original Art by Michelangelo vs. Cruise Ships: Cruise ships are more elastic. The supply of Michelangelo's art is nearly perfectly inelastic (fixed).
Hamburgers vs. Hotel Rooms: Hamburgers are more elastic. Fast food production is faster than hotel construction, and input costs for hamburgers are lower.

Demand Curves:
- Typically intersect both the price (y) and quantity (x) axes (except for perfectly elastic and inelastic cases).
- Have a price point where no one will buy, and a quantity where marginal benefit is zero.
- Constant-slope demand curves are half elastic and half inelastic, with the unit elastic point in the middle.
Supply Curves:
- Will only intersect one point along the axes (price, quantity, or the origin).
- Can be entirely elastic, entirely inelastic, or entirely unit elastic.

Critical Factor: For supply curves, where the curve intersects the axes is more important than the slope.
- An inelastic supply curve can become elastic if it shifts far enough to the left to intersect the price axis.

Total Revenue and Supply: At every price increase for supply, total revenue goes up (assuming all supplied units are purchased).
Difference from Demand: Demand has a unitary elastic point where revenue starts to decrease after price increases.
Reason for Inapplicability: Because revenue always increases with quantity supplied, the total revenue test is not used to determine elasticity of supply.