Price Elasticity of Supply

Definition

• Price Elasticity of Supply: A measure of the responsiveness of producers to changes in price.
• Calculated similarly to demand elasticity.

Calculation

• Represented by the Greek letter Epsilon (ε).
• Formula: [ \text{Price Elasticity of Supply} = \frac{\text{Percent Change in Quantity Supplied}}{\text{Percent Change in Price}} ]
• Delta (Δ): Represents change in values.

Example Calculation

1. Initial price = 30, Quantity = 40 units.
2. New price = 50, Quantity = 60 units.
   • Percent change in quantity supplied = ( \frac{60 - 40}{40} = 0.5 \text{ or } 50% )
   • Percent change in price = ( \frac{50 - 30}{30} = 0.667 \text{ or } 66.7% )
   • Elasticity = ( \frac{50}{66.7} = 0.75 )
   • Interpretation: A 1% increase in price results in a 0.75% increase in quantity supplied.

Categories of Price Elasticity of Supply

• Elastic (>1):
  • Highly responsive to price changes.
  • Example: Yellow supply curve, small price change results in large quantity change.
• Unit Elastic (=1):
  • Special case; not common.
• Inelastic (<1):
  • Not very responsive to price changes.
  • Example: Red supply curve, large price changes result in small quantity changes.

Importance of Price Elasticity of Supply

• Labor Market Example (2021-2022):
  • Increased wages due to competition for workers.
  • Wages for lowest income earners rose by 20%.
  • Inelastic supply indicated by firms unable to hire enough workers despite higher wages.

Factors Influencing Elasticity of Supply

• Time:
  • Supply becomes more elastic over time as adjustments and alternatives are found.
• Opportunity Cost:
  • In 2021-2022, high opportunity costs deterred workers from low-paying jobs.

Discussion

• Consider what other factors might influence the elasticity of supply.