Concise Summary of Price Elasticity of Supply

Price Elasticity of Supply

  • Definition: Price elasticity of supply quantifies how much the quantity supplied of a good changes in response to a change in its price. It is expressed as the percentage change in quantity supplied resulting from a 1% change in price.

  • Determinants:

    • Time period: Supply is generally more elastic in the long run.
    • Productive capacity: The ability of sellers to adjust production levels.
    • Size of the firm/industry: Larger firms may have more capability to adjust supply.
    • Mobility of factors of production: The ease with which resources can be reallocated affects elasticity.

Calculating Price Elasticity of Supply

  • Formula: Price elasticity of supply can be calculated using the formula:
    E_s = \frac{\text{Percentage Change in Quantity Supplied}}{\text{Percentage Change in Price}}

  • Example: If the price of bicycles increases by 10% and the supply increases by 15%, the elasticity would be:
    E_s = \frac{15\%}{10\%} = 1.5

Methods of Computing Elasticity

  • Midpoint method: Used to calculate the elasticity of supply between two points (Q1, P1) and (Q2, P2).
  • Point elasticity: Measures elasticity at a specific point on the supply curve.

Supply Curve Elasticity

  • The elasticity of supply varies with the slope of the supply curve:
    • A flatter curve indicates more elastic supply.
    • A steeper curve indicates less elastic supply.

Types of Supply Elasticity

  1. Perfectly Inelastic Supply:

    • Elasticity equals 0; quantity supplied does not change with price.

  2. Inelastic Supply:

    • Elasticity is less than 1; a price increase leads to a proportionally smaller increase in quantity.

  3. Unit Elastic Supply:

    • Elasticity equals 1; percentage changes in price and quantity supplied are equal.

  4. Elastic Supply:

    • Elasticity is greater than 1; quantity supplied changes more than proportionally compared to price changes.

  5. Perfectly Elastic Supply:

    • Elasticity is infinite; any price above a certain point results in infinite supply.

Summary of Elasticities

  • Price Elasticity of Demand: Measures how quantity demanded responds to price changes; affects total revenue based on elasticity.
  • Income Elasticity of Demand: Measures quantity demanded response to changes in consumer income.
  • Cross-Price Elasticity: Measures response of quantity demanded of one good to the price of another good.
  • Generally, supply is more elastic in the long run than in the short run, and elasticity is fundamental in various market applications.