PRICE ELASTICITY OF SUPPLY AND DEMAND
Lets think about this for a second…
PRICE ELASTICITY OF DEMAND
Takes into account the reaction of Consumers to Changes in Price.
Right?
SO THAT MUST MEAN….
Elasticity of supply takes into account the reaction of consumers to changes in
quantity supplied.
WRONG!!!!!
THE DEFINITION
Recall - The price elasticity of demand measures the responsiveness
of consumers to changes in a products price
• Price Elasticity of Supply or Supply Elasticity measures the
responsiveness of producers and the quantity they supply to
changes in price.
DON’T BE LIKE MINOR MISTAKE MELVIN!
Never forget:
When we talk about Price elasticity of Demand, we measure consumer reaction to
price change.
When we talk about supply elasticity we measure producer reaction to price change.
ELASTIC SUPPLY
As in an elastic demand curve, elastic supply is achieved when the percentage
change in the products price leads to a larger percentage change in it’s quantity
supplied.
In simple terms:
Quantities that producers are willing to sell are VERY RESPONSIVE to price changes.
Lets refer to FIGURE 3.7 in your textbook pg. 70
INELASTIC SUPPLY
If the percentage change in price causes a smaller percentage change in in quantity
supplied then we get INELASTIC SUPPLY.
In simple terms:
The quantity of an item that producers are willing to sell is NOT VERY RESPONSIVE
when compared to change in price of the item.
FACTORS THAT AFFECT SUPPLY ELASTICITY
First and foremost:
TIME
THE IMMEDIATE RUN
•
This is the period during which the businesses in a given industry are unable to
alter the quantities of resources they use.
Refer to text page 71 for the strawberry example.
In the IMMEDIATE RUN, supply is said to be PERFECTLY INELASTIC.
What will the curve look like?
THE SHORT RUN
•
In this period, the quantity of at least ONE of the resources used by businesses in
a given industry are unable to be varied.
•
Refer to page 71 for another strawberry example….
The supply elasticity in the short run could be elastic OR inelastic…
Why?
THE LONG RUN
•
Over the long run, the quantities of all of the resources used in an industry can be
varied.
•
Refer to page 71 for yet ANOTHER strawberry example…
•
Leads to perfectly Elastic Supply
HOW DO WE CALCULATE IT?
Similar to the price elasticity of Demand:
Es =
Qs
P
Remember, to get percent change we do the following:
NEW QUANT – OLD QUANT / OLD QUANT
NEW PRICE – OLD PRICE / OLD PRICE