Download Elastic

(Price) Elasticity of Supply
What is elasticity of supply?
What are the types of elastic supply?
How do you graph the types of elasticity?
How do you calculate elasticity?
Why do businesses care about elasticity of supply?
What is elasticity of supply?
• Elasticity is the degree
to which a producer will
change the quantity
supplied in reaction to a
change in price
– In other words: how
strongly suppliers react to a
change in price
– Will the reaction be large
(stretched band), small
(very little stretch) or none
at all?
• We calculate elasticity
with the following
equation:
Calculating Elasticity
• What does this equation
mean?
• How do you calculate a
percentage change?
Original # - New # x 100
original #
• “the % change in quantity
supplied (Qs), divided by
the % change in price”
• Another important thing to
remember is that
percentage changes can
be positive or negative,
but elasticity is always
an absolute value
(positive).
A few other quick notes…
• Elasticity can be roughly
compared by looking at
the relative steepness or
flatness of a curve.
• It makes sense that the
formula for calculating
elasticity is similar to the
formula used for
calculating slope
(rise/run)=(quantity/price).
• Remember to drop any
minus signs when finding
your final value for
elasticity.
Stop and Practice…
The table gives part of
the supply schedule for
PCs. Calculate the price
elasticity of supply when
the price increases from
$900 to $1,100.
Price of
computer
Quantity of
computers
supplied
$1,100 12,000
$900
8,000
• Step 1: calculate the
percentage change of quantity
supplied
(8000-12000) = (-0.5)=-50%
(8000)
• Step 2: calculate the
percentage change of price
(900-1100) = (-0.20)=-20%
(900)
• Step 3: Make the numbers
positive, then solve using the
equation
(.5) = 2.5
(.2)
The supply elasticity is equal to
2.5. It is therefore ELASTIC
Graphing elasticity
• Graphically, elasticity can
be represented by the
appearance of the supply
curve.
• If a curve is more elastic,
then small changes in
price will cause large
changes in quantity
supplied.
– This curve will be close to
horizontal
Graphing elasticity
• If a curve is less
elastic (inelastic),
then it will take large
changes in price to
effect a change in
quantity supplied.
– This curve will tilt more
vertically
• At the extremes, a
perfectly elastic curve
will be horizontal
– An Elastic curve is
flatter, like the
horizontal lines in the
letter E.
• a perfectly inelastic
curve will be vertical.
– an Inelastic curve is
more vertical, like the
letter I.
What kinds of elasticity exist?
1. Elastic—when the %
change in Qs
(numerator) is greater
than % change in P
(denominator)
– VALUE IS
THEREFORE
GREATER THAN
ONE (1)
2. Inelastic—when the
% change in Qs
(numerator) is less
than % change in P
(denominator)
– VALUE IS
THEREFORE LESS
THAN ONE (1)
3. Unit(ary) elastic—when the % change in Qs
(numerator) is equal to the % change in P
(denominator)
– VALUE IS THEREFORE EQUAL TO ONE (1)
– Dividing point between elastic and inelastic demand
(where total revenue is maximum)