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Lecture 20190808

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32 views

Lecture 20190808

Uploaded by

Anubhav
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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You are on page 1/ 17

© 2007 Thomson South-Western

THE ELASTICITY OF SUPPLY


• Price elasticity of supply is a measure of how
much the quantity supplied of a good responds
to a change in the price of that good.
• Price elasticity of supply is the percentage
change in quantity supplied resulting from a
percentage change in price.

© 2007 Thomson South-Western


Figure 5 The Price Elasticity of Supply

(a) Perfectly Inelastic Supply: Elasticity Equals 0

Price
Supply

$5

4
1. An
increase
in price . . .

0 100 Quantity

2. . . . leaves the quantity supplied unchanged.

© 2007 Thomson South-Western


Figure 5 The Price Elasticity of Supply

(b) Inelastic Supply: Elasticity Is Less Than 1

Price

Supply
$5

4
1. A 22%
increase
in price . . .

0 100 110 Quantity

2. . . . leads to a 10% increase in quantity supplied.

© 2007 Thomson South-Western


Figure 5 The Price Elasticity of Supply

(c) Unit Elastic Supply: Elasticity Equals 1


Price

Supply
$5

4 (If SUPPLY is unit


elastic and linear, it will
1. A 22%
increase
begin at the origin.)
in price . . .

0 100 125 Quantity


2. . . . leads to a 22% increase in quantity supplied.

© 2007 Thomson South-Western


Figure 5 The Price Elasticity of Supply

(d) Elastic Supply: Elasticity Is Greater Than 1


Price

Supply

$5

4
1. A 22%
increase
in price . . .

0 100 200 Quantity

2. . . . leads to a 67% increase in quantity supplied.

© 2007 Thomson South-Western


Figure 5 The Price Elasticity of Supply

(e) Perfectly Elastic Supply: Elasticity Equals Infinity


Price

1. At any price
above $4, quantity
supplied is infinite.

$4 Supply

2. At exactly $4,
producers will
supply any quantity.

0 Quantity
3. At a price below $4,
quantity supplied is zero.

© 2007 Thomson South-Western


The Price Elasticity of Supply and Its
Determinants
• Ability of sellers to change the amount of the
good they produce.
• Beach-front land is inelastic.
• Books, cars, or manufactured goods are elastic.
• Time period
• Supply is more elastic in the long run.

© 2007 Thomson South-Western


Computing the Price Elasticity of Supply

• The price elasticity of supply is computed as


the percentage change in the quantity supplied
divided by the percentage change in price.
Percentage change
in quantity supplied
Price elasticity of supply =
Percentage change in price

© 2007 Thomson South-Western


TWO APPLICATIONS OF SUPPLY,
DEMAND, AND ELASTICITY
• Can good news for farming be bad news for
farmers?
• What happens to wheat farmers and the market
for wheat when university agronomists
discover a new wheat hybrid that is more
productive than existing varieties?

© 2007 Thomson South-Western


Can Good News for Farming Be Bad News
for Farmers?

• Examine whether the supply or demand curve


shifts.
• Determine the direction of the shift of the
curve.
• Use the supply-and-demand diagram to see how
the market equilibrium changes.

© 2007 Thomson South-Western


Figure 7 An Increase in Supply in the Market for Wheat
Price of
Wheat 1. When demand is inelastic,
2. . . . leads an increase in supply . . .
to a large fall S1
in price . . . S2

$3

Demand

0 100 110 Quantity of


Wheat
3. . . . and a proportionately smaller
increase in quantity sold. As a result,
revenue falls from $300 to $220.
© 2007 Thomson South-Western
Compute the Price Elasticity of Demand When There Is a
Change in Supply

100  110
(100  110) / 2
ED 
3.00  2.00
(3.00  2.00) / 2

0.095
  0.24
0.4

Demand is inelastic.
© 2007 Thomson South-Western
Why Did OPEC Fail to Keep the Price of
Oil High?
• Supply and Demand can behave differently in
the short run and the long run
• In the short run, both supply and demand for oil are
relatively inelastic
• But in the long run, both are elastic
• Production outside of OPEC
• More conservation by consumers

© 2007 Thomson South-Western


Summary

• Price elasticity of demand measures how much


the quantity demanded responds to changes in
the price.
• Price elasticity of demand is calculated as the
percentage change in quantity demanded
divided by the percentage change in price.
– If a demand curve is elastic, total revenue falls
when the price rises.
– If it is inelastic, total revenue rises as the price
rises.

© 2007 Thomson South-Western


Summary

• The income elasticity of demand measures


how much the quantity demanded responds to
changes in consumers’ income.
• The cross-price elasticity of demand measures
how much the quantity demanded of one good
responds to the price of another good.
• The price elasticity of supply measures how
much the quantity supplied responds to
changes in the price.

© 2007 Thomson South-Western


Summary

• In most markets, supply is more elastic in the


long run than in the short run.
• The price elasticity of supply is calculated as
the percentage change in quantity supplied
divided by the percentage change in price.
• The tools of supply and demand can be applied
in many different types of markets.

© 2007 Thomson South-Western

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