6.3 Price Elasticity of Supply Overview

Overview

This lecture explains price elasticity of supply, factors affecting it, and how it differs between goods and over time.

Price elasticity of supply measures how much quantity supplied responds to price changes.
Formula: percent change in quantity supplied divided by percent change in price.
The point method can also be used on the supply curve.

Perfectly inelastic supply: vertical supply curve, elasticity = 0; quantity supplied doesn't change with price.
Perfectly elastic supply: horizontal supply curve, elasticity = infinity; tiny price changes cause huge changes in quantity supplied.
Inelastic supply: elasticity < 1, supply curve is steep; quantity supplied responds little to price changes.
Elastic supply: elasticity > 1, supply curve is flat; quantity supplied responds greatly to price changes.
Unit elastic supply: elasticity = 1; percentage change in supply equals percentage change in price.

Availability of inputs: If producers can easily obtain resources, supply is more elastic.
Hard-to-acquire or scale inputs make supply more inelastic.
Example: Land is inelastic (can't create more), while cars are elastic (production can be increased).
Time horizon: Supply is more elastic in the long run as firms can adapt more fully.

Demand dropped sharply for houses and cars, causing prices to fall.
House supply is very inelastic; prices fell dramatically because supply couldn't adjust quickly.
Car supply is elastic; manufacturers could adjust production, so prices didn't fall as much.

Price Elasticity of Supply — A measure of how much quantity supplied changes in response to price changes.
Perfectly Inelastic Supply — Supply where quantity doesn't change with price (vertical supply curve).
Perfectly Elastic Supply — Supply where any price change causes infinite change in quantity supplied (horizontal supply curve).
Unit Elastic Supply — Percent change in quantity supplied equals percent change in price.