Overview
This lecture explains the concept of price elasticity of supply, how it compares to elasticity of demand, types of supply elasticity, and factors that determine how responsive supply is to price changes.
Price Elasticity of Supply
- Price elasticity of supply measures the percent change in quantity supplied for a percent change in price.
- Supply elasticity is always positive because supply curves slope upwards; as price rises, quantity supplied increases.
- A supply elasticity of 0.5 means a 10% increase in price leads to a 5% increase in quantity supplied.
- A supply elasticity of 2 means a 10% increase in price leads to a 20% increase in quantity supplied.
- The higher the elasticity, the more responsive supply is to price changes.
Types of Supply Elasticity
- Perfectly inelastic supply (elasticity = 0): Quantity supplied does not change with price (e.g., land around a stadium).
- Inelastic supply (elasticity > 0 but < 1): Large price changes cause small changes in quantity supplied.
- Elastic supply (elasticity > 1): Small price changes cause large changes in quantity supplied.
- Perfectly elastic supply (elasticity = infinite): Any small price change leads to an infinite change in quantity supplied; this is a theoretical extreme.
Factors Affecting Supply Elasticity
- Inventories and Storability: Products that can be stored (e.g., frozen turkeys) have more elastic supply than those that cannot (e.g., fresh flowers).
- Available Inputs and Capacity Constraints: Supply is more elastic when additional inputs are easily available and production can be scaled up quickly (e.g., pizza shops vs. hospitals).
- Ease of Entry and Exit: Markets that are easy to enter or exit (e.g., pizza shops) have more elastic supply.
- Time: Supply becomes more elastic over longer periods, as firms can adjust more (buy more inputs, open new locations, etc.).
Key Terms & Definitions
- Price Elasticity of Supply — The measure of how much quantity supplied changes for a given change in price.
- Perfectly Inelastic Supply — Supply where quantity does not change at all as price changes (elasticity = 0).
- Inelastic Supply — Supply where quantity changes by a smaller percentage than the price (0 < elasticity < 1).
- Elastic Supply — Supply where quantity changes by a larger percentage than the price (elasticity > 1).
- Perfectly Elastic Supply — Supply where any tiny price change causes quantity supplied to change infinitely (elasticity = infinity).
Action Items / Next Steps
- Review the factors that affect elasticity of supply and be able to provide examples for each.
- Prepare to apply the concept of elasticity to real-world supply scenarios in upcoming assignments.