Download Elasticity of Supply

Elasticity

Elasticity – measure of responsiveness
that tells us how a dependent variable
such as quantity responds to a change in
an independent variable such as price.

Can be applied to income, quantity of a
product supplied by a firm or demand.
Demand Elasticity
In case of demand, consider whether a
given change in a price will cause a
relatively larger, a relatively smaller, or a
proportional change in quantity
demanded.
 Consumers are very sensitive to prices.
 Demand elasticity is the extent to which a
change in price causes a change in the
quantity demanded.

Elasticity tells us

How sensitive consumers are to these
changes.
Demand is . . .


Elastic when a given change in price causes a
relative larger change in quantity demanded.
(example: fresh vegetables. Because there
are more in the summer, consumers increase
the amount they purchase. When we have
higher prices in winter, we buy fewer fresh
vegetables & use canned products instead.)
Inelastic demand is when a given change in
price causes a relatively smaller change in
the quantity demanded. (example: sale)
Demand is . . .

Unit elastic when a given change in price
causes a proportional change in quantity
demanded. In other words: the percent
change in quantity roughly equals the
percent change in price.
Elastic Demand
Inelastic demand
Perfectly InElastic
Perfectly Elastic
Determinants of Demand
Elasticity

Can the Purchase Be Delayed
 If purchase cannot be put off, demand is inelastic.
 If purchase can be delayed, demand is elastic.
 Examples: Insulin – inelastic; tobacco (addictive) –
inelastic; corn, tomatoes – elastic; gas at a
particular station – elastic.
 If you can delay purchase, demand is elastic.
Determinants of Demand
Elasticity

Are Adequate Substitutes Available?
 If yes, consumers can switch back & forth to take
advantage of the best price.
 Substitutes – butter, margerine; substitutes for
beef; substitutes for chicken;
 The fewer the substitutes, the more inelastic
demand is.
Determinants of Demand
Elasticity

Does the purchase use a large portion of
income?
 If yes, demand tends to be elastic.
 If no, demand tends to be inelastic.

Medical services tends to be inelastic even
though they take a large portion of
income.
What is supply?

Supply is:
 The amount of a product that would be offered for
sale at all possible prices that could prevail in the
market.

Law of Supply says:
 Suppliers will normally offer more for sale at high
prices and less at lower prices.
Suppliers have to decide:

How much to offer for sale at various
prices
 This is a decision that is best for the individual
seller.
 What’s best depends on the cost of producing the
goods or services.

Concept of supply can be listed in a table
or a graph – supply schedule or supply
curve.
Supply

What’s a supply schedule?
 Listing of various quantities of a particular product
supplied at all possible prices in the market.
Individual supply curve – a graph showing
the various quantities supplied at each
and every price that might prevail in the
market.
 Market supply curve – shows the
quantities offered at various prices by all
firms that offer the product for sale in a
given market.

Illustration of Supply Schedule
& Supply Curve
Individual and Market (page 114)
Supply curve slopes from lower left-hand
corner of the graph to the upper right
hand corner.
 It’s a positive slope & shows that if one of
the values goes up, the other will go up
too.
 We could be suppliers too – supplying
labor – doesn’t have to be products.


Change in Quantity Supplied
Quantity supplied is amount that
producers bring to market at any given
price.
 Change in quantity supplies is the change
in amount offered for sale in response to a
change in price.

Good morning!

There are 6 factors that can cause a
change in supply. List them on your sheet
of paper.
Change in Supply
Change in Cost of inputs (labor prices
increase/decrease – workers’ salaries)
 Increase/decrease in productivity
 Technology (new machine, tool that can
get the job done more efficiently)
 Taxes/Subsidies

 Firms view taxes as a cost – could be a fee like a
license
 Subsidy is a government payment to an individual,
business or other group.
Changes in Supply

Change in Supplier Expectations
 Change in expectation of future price of a product

Government Regulations
 Tarif/excise tax; EPA

Number of Sellers