By this point, you figured out that thinking about supply is very similar to thinking about demand. And in the same way, we can apply the concept of price elasticity to supply. The percent change in quantity supplied for a percent change in price.
So, a supply curve with an elasticity of 0.5 would tell us that a 10% increase in price leads to a 5% increase in the quantity supplied. And an elasticity of 2 tells us that a 10% increase in price leads to a 20% increase in quantity supplied. The larger the number, The more responsive the quantity supplied is to a change in price, the more elastic it is.
The stretchier the rubber band is, you apply a change in price and it stretches a lot. Notice that the elasticity of supply is a positive number, unlike the elasticity of demand. That makes sense.
When price goes up, quantity supplied goes up. The supply curve slopes upwards, so its elasticity will be positive. Now, when the elasticity of supply is zero, Like in this graph, the supply curve is perfectly inelastic.
No matter what the price is, the quantity supplied is the same. So here's an example. The supply of land around Kyle Field is pretty much perfectly inelastic. You can't really make more land.
You can build more buildings and taller buildings but you can't make more land. When the elasticity of supply is greater than 0 but less than 1, we call it inelastic. So it is greater than 0 but less than 1 and we'll call it inelastic.
Why? Because a big change in price has a small effect on quantity. Remember the rubber band. We're pulling on it hard with a big change in price, but we're not changing the quantity very much. Now, when the elasticity is greater than one, we call that supply elastic.
It'll have a pretty flat slope. A small change in price has a big effect on quantity, like a loose rubber band. We don't have to pull on it very hard to change the quantity by a lot.
Finally, we can imagine perfectly in an elastic supply. The elasticity is infinite. That's perfectly elastic supply. Even a tiny change in price will change the quantity supplied enormously, infinitely.
In reality, this is pretty unrealistic. A small percent change in price leads to an infinite percent reduction in quantity supplied. It would tell us that a small change in price leads the producer to supply as much as possible and a tiny reduction in price leads her to stop supplying at all.
Perfectly elastic. It's really more useful as an extreme example than necessarily as a real-world application. So what determines the price elasticity of supply? Remember that elasticity is a measure of responsiveness.
The responsiveness of quantity supplied to price. So, what determines how responsive a business can be? It's all about how flexible the business is. So, what factors go into that?
First, there are inventories and storability. If you can store your product, then you can respond to changes in price by supplying more or less. Something like frozen turkeys are easily storable.
You can sell them next week or next month without any real problems. But fresh flowers, you need to sell those pretty much right away. If your product is storable, you have more flexibility and your supply is likely to be more elastic.
Second, available inputs and capacity constraints. If you can't scale up your production quickly, you can't really respond to changes in prices. Antonio's Pizza can get more flour, sauce, and even delivery drivers much more easily than a hospital can get more MRI machines, operating rooms, and doctors or nurses.
So, if your inputs are easily available, or you have extra space to expand, you're more flexible and your supply is likely to be more elastic. Third, easy entry and exit. The more easy it is for other companies to enter a market, the more elastic supply will be. It's much easier to open a new pizza shop, though it is a lot of hard work, than it is to open a new hospital.
When the price of pizza goes up, we're likely to see more pizza places open. So, if entry into the market is relatively easy, supply is likely to be more elastic. Fourth, time.
Adjusting supply takes time. So, the price elasticity of supply is generally higher over a longer time span. If the price of pizza goes up, Antonio's can respond by using up there's stored flour and sauce and cheese, but there's a limit to how much they have.
If the price stays high, over the next days and weeks they can purchase more flour and sauce and cheese and even hire some more workers. But they'll run out of oven space eventually. And so over the longer run, they might open a new location or other pizza places will open.
The longer the time span, the more elastic supply tends to be.