3.4 Elasticity of Supply Lecture

Understanding Price Elasticity of Supply

  • Supply elasticity is a measure of how the quantity supplied responds to a change in price.

  • Elasticity of supply can be quantified by the percent change in quantity supplied divided by the percent change in price.

    • Example: A supply curve with an elasticity of 0.5 indicates that a 10% increase in price results in a 5% increase in quantity supplied.

    • Conversely, an elasticity of 2 suggests that the same 10% price increase leads to a 20% increase in quantity supplied.

Elasticity Scale

  • Greater Elasticity: A larger elasticity number indicates greater responsiveness of quantity supplied to price changes.

    • Analogous to a stretchy rubber band: a price change results in a significant change in quantity supplied.

  • Positive Number: Unlike demand elasticity, supply elasticity is always a positive value due to the upward slope of the supply curve.

  • Perfectly Inelastic Supply:

    • Elasticity = 0; the quantity supplied remains constant regardless of price changes.

    • Example: Supply of land around Kyle Field is considered perfectly inelastic; you cannot create more land.

  • Inelastic Supply:

    • Elasticity is between 0 and 1; a significant price change results in a minor change in quantity supplied.

    • Visualization: Rubber band pulled hard with minimal change in length.

  • Elastic Supply:

    • Elasticity is greater than 1; a small price change leads to a large change in quantity supplied.

    • Visualization: Loose rubber band responds significantly to minor pulls.

  • Perfectly Elastic Supply:

    • Elasticity is theoretically infinite; even tiny changes in price yield extreme changes in quantity supplied.

    • It's more of a theoretical construct than a realistic scenario.

Factors Influencing Price Elasticity of Supply

  1. Inventories and Storability:

    • Products that can be stored allow businesses to respond flexibly to price changes (e.g., frozen turkeys vs. fresh flowers).

    • Storable products typically have more elastic supply because suppliers can increase or decrease supply more easily.

  2. Available Inputs and Capacity Constraints:

    • The ease with which businesses can access inputs and scale up production influences elasticity.

    • Example: A pizza shop can quickly obtain more ingredients, while a hospital cannot quickly expand its operational capacity.

  3. Easy Entry and Exit:

    • When it's easier for companies to enter or exit a market, supply tends to be more elastic.

    • Example: Opening a new pizza shop is easier compared to establishing a new hospital, impacting the market's elasticity.

  4. Time:

    • Price elasticity of supply is generally higher over longer timeframes as businesses adjust their supply strategies.

    • A short-term price increase might lead to immediate use of existing inventory; however, over time, businesses can expand production and hire additional staff.