Lecture on Supply Elasticity

Introduction

• Supply Elasticity: Similar to demand elasticity, it measures the responsiveness of the quantity supplied to a change in price.
• Elasticity Formula: Percent change in quantity supplied per percent change in price.

Elasticity Values and Interpretation

• Elasticity of 0.5: A 10% price increase leads to a 5% increase in quantity supplied.
• Elasticity of 2: A 10% price increase leads to a 20% increase in quantity supplied.
• Higher Elasticity Values: Indicate a more responsive supply to price changes (more elastic).
• Positive Elasticity: Supply elasticity is always positive because when price goes up, quantity supplied goes up (upward sloping supply curve).

Types of Supply Elasticity

• Perfectly Inelastic Supply (Elasticity = 0): Quantity supplied remains the same regardless of price (e.g., land around a fixed area like Kyle Field).
• Inelastic Supply (0 < Elasticity < 1): Large price changes have small effects on quantity supplied.
• Elastic Supply (Elasticity > 1): Small price changes have large effects on quantity supplied.
• Perfectly Elastic Supply (Elasticity = ∞): Even a tiny price change leads to an enormous change in quantity supplied (theoretical concept).

Determinants of Price Elasticity of Supply

• Inventories and Storability:
  • Products that can be stored (e.g., frozen turkeys) allow more elastic supply compared to perishable goods (e.g., fresh flowers).
• Available Inputs and Capacity Constraints:
  • Ease of obtaining inputs and capacity for expansion affect elasticity (e.g., pizza shop vs. hospital resources).
• Ease of Market Entry and Exit:
  • More elastic supply if it is easier for new competitors to enter the market (e.g., pizza shops vs. hospitals).
• Time:
  • Supply elasticity tends to increase over longer time frames as businesses adjust their capacity and resources.

Conclusion

• Understanding supply elasticity helps in predicting how changes in price affect the quantity of goods businesses are willing to provide.