Overview
This lecture explores the determinants of the price elasticity of supply, focusing on the factors that make supply more elastic or inelastic.
Price Elasticity of Supply: Recap
- Price elasticity of supply measures how much the quantity supplied changes in response to a price change.
- Elasticity is calculated as the percent change in quantity supplied divided by the percent change in price.
Interpreting the Supply Curve
- Steeper (more vertical) sections of the supply curve indicate more inelastic supply.
- Perfectly vertical supply means perfectly inelastic supply—quantity cannot change regardless of price.
- Flatter (more horizontal) sections indicate more elastic supply.
- Perfectly horizontal supply means perfectly elastic supply—any small price change results in large changes in quantity supplied.
Determinants of Supply Elasticity
Factors Leading to Inelastic Supply
- In the short run, production cannot easily increase due to fixed resources, full factory utilization, or limited skilled labor.
- If all factories and workers are fully engaged or critical resources (like oil) are maxed out, supply cannot expand much even if prices rise.
- Short time frames make supply less flexible and more inelastic.
Factors Leading to Elastic Supply
- In the long run, production can expand as firms build more factories, train workers, and secure additional resources.
- If factories are underused or resources are easily available, supply can increase quickly when prices rise.
- Greater resource availability and time make supply more elastic.
Key Terms & Definitions
- Price Elasticity of Supply — The responsiveness of quantity supplied to changes in price.
- Elastic Supply — Large change in quantity supplied when price changes.
- Inelastic Supply — Small change in quantity supplied when price changes.
- Short Run — Period when some resources or capacity are fixed.
- Long Run — Period when all resources and capacities can be adjusted.
Action Items / Next Steps
- Review examples of elastic and inelastic supply in real-world markets.
- Practice drawing and interpreting supply curves with different elasticities.