Download The elasticity of supply

Elasticity of Supply
Guiding Questions
• What is the difference between elastic
supply and inelastic supply?
• What makes a good or service have elastic
or inelastic supply?
THE ELASTICITY OF
SUPPLY
• The elasticity of supply is a measure of how
much the quantity supplied of a good
responds to a change in the price of that
good.
Elastic vs. Inelastic Supply
– (1) When supply is elastic, producers can
increase production without a rise in cost or a
time delay
– (2) When supply is inelastic, firms find it hard
to change their production levels in a given
time period.
Brainstorming with the idea of
elasticity of supply
What factors do you think will make supply
of a good/service elastic? That is, what
factors make it easy for suppliers to increase
supply of their product without a rise in cost
or time delay?
Need to think
from the business
perspective!
What factors do you think will make supply
of a good/service inelastic? That is, what
factors make it hard for suppliers to increase
supply of their product without a rise in cost
or time delay?
What Determines Supply
Elasticity?
1. Ability of Suppliers to change production
• Factor substitution possibilities
– Can the factors of production be switched easily when
there is a change in demand?
• When factor substitution is possible and can be
achieved at low cost, supply will be elastic
• When factors are highly specialized, substitution may
be harder and thus supply will be inelastic
• Resources are cheap and quick to come by
Determinants of Elasticity of Supply
2. The time frame allowed
– Momentary period (fixed supply)
– Short run (inelastic supply)
– Long run (elastic supply)
Decide on the PeS
Football stadiumFresh salmon
oil
Reminder:
PeS shows whether firms
can respond to a rise in
price by increasing their
supply
Elastic = easy to increase
Supply without cost and
time issues.
Inelastic = harder to change
supply
Flu shots
New houses
Figure 6 The Price Elasticity of Supply
(b) Inelastic Supply
Price
Supply
$5
4
0
100
110
Quantity
2. . . . leads to a small increase in quantity supplied.
Copyright©2003 Southwestern/Thomson Learning
Figure 6 The Price Elasticity of Supply
(d) Elastic Supply
Price
Supply
$5
4
0
100
200
Quantity
2. . . . leads to a large increase in quantity supplied.
Copyright©2003 Southwestern/Thomson Learning
Decide in each of the following cases
a. whether supply is likely to be elastic or
inelastic
b. Why
c. Draw an approximate supply curve
based on your decision
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Pork (2 months time frame)
Paper clips (1 month time frame)
Fresh strawberries (in summer)
Neck ties (1 week time frame)
Canned peas (1 month time frame)
Aeroplanes (1 month time frame)
World Series shirts (1 month time frame)