chapter6-4elasupply

8/11/2019 chapter6-4elasupply

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Chapter 6-4

Price Elasticity of

Supply


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Copyright Houghton Mifflin Company. All rights reserved. 6 | 2Copyright Houghton Mifflin Company. All rights reserved. 6 | 2

Price Elasticity

The pr ice elast ic i ty of supplyis the

proportional change in quantity demanded

relative to the proportional change in price.

priceinchangePercentage

suppliedquantityinchangePercentage=ES


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The Price Elasticity of Supply

The price elasticity of supply is thepercentage change in the quantity

supplied divided by the percentage

change in price.

P

Qe

S

s

%

%


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Elastic Supply

Elastic supply means that quantity

changes by a greater percentage than the

percentage change in price.


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Inelastic Supply

Inelastic supply means that quantity

doesn't change much with a change in

price.


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Price Elasticity of Supply

and Shape of Supply Curve

The price elasticity of supply is either zeroor a positive number.

A zero price elasticity of supply means thatthe quantity supplied will not vary as theprice varies.

A positive price elasticity of supply meansthat as the price of an item rises, the

quantity supplied rises.


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Supply Curve

Shapes and Elasticity


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Supply Elasticities

in the Long and Short Runs The shape of the supply curve depends

primarily on the length of time being

considered.In the short run, at least one of the

resources used in production cannot bechanged.

In the long run, the firm has longenough to change any aspect ofproduction, and therefore can more fully

respond.


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Interaction of Price

Elasticities of Demand and Supply Both the price elasticity of demand and the

price elasticity of supply determine the full

effect of a price change.


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Interaction of Elasticities

If the price elasticity of supply of an item is

large and the demand for it is price

inelastic, then the firm can raise the pricewithout losing revenue.


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Interaction of Elasticities

Conversely, if the price elasticity of supply

is small and the price elasticity of demand

is large, then the firm is unable to raise theprice because the consumer will switch to

another firm or product


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Incidence and Taxes

Incidence is the measure of who actually paysfor a cost increase or a tax.

In general, the more elastic the demand and the

less elastic the supply the more the incidence ofa tax falls on businesses and the less it falls on

consumers.


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Elasticity and Shifting

Supply and Demand The more elastic the

demand (supply), the

greater the effect of asupply (demand) shift

on quantity, and the

smaller the effect on

price.

SDEE

S%

P%

SDEE

D%P%


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Effects of Shifts in Supply

on Price and Quantity

P0

P1

DPr

ice

Quantity

S0 S1

Q0Q1

P0

P1

DPr

ice

Quantity

S0S1

Q0Q1

Inelastic Demand Elastic Demand

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