Overview
This lecture introduces the price elasticity of supply, explains how to calculate it, and discusses its significance in economic analysis.
Price Elasticity of Supply: Definition & Formula
- Price elasticity of supply measures how sensitive the quantity supplied is to percent changes in price.
- It is calculated as the percent change in quantity supplied divided by the percent change in price.
Example: Calculating Price Elasticity of Supply
- Moving from point A to B: price rises from 4 to 6 (50% increase), quantity supplied rises from 1 to 2 (100% increase), elasticity = 100% / 50% = 2.
- Moving from point B to C: price rises from 6 to 8 (≈33.3% increase), quantity supplied rises from 2 to 3 (50% increase), elasticity = 50% / 33.3% ≈ 1.5.
- Elasticity can change even on a linear supply curve and is not equal to the curve's slope.
Calculation Methods & Directionality
- The simplest calculation method gives different elasticity values depending on the direction (A to B vs. B to A).
- The midpoint method provides consistent values regardless of calculation direction but is not covered in this lecture.
Elastic vs. Inelastic Supply
- Supply is inelastic if the magnitude of elasticity is less than 1 (quantity supplied is not very sensitive to price changes).
- Supply is elastic if the magnitude of elasticity is greater than 1 (quantity supplied responds more than the price change).
Key Terms & Definitions
- Price elasticity of supply — A measure of how much quantity supplied responds to a change in price.
- Elastic supply — Elasticity magnitude greater than 1; quantity supplied changes more than the price.
- Inelastic supply — Elasticity magnitude less than 1; quantity supplied changes less than the price.
- Midpoint method — An advanced technique for calculating elasticity to avoid directional bias (not detailed in this lecture).
Action Items / Next Steps
- Practice calculating price elasticity of supply using provided examples.
- Review differences between elasticity of supply and elasticity of demand.