Economics
Elasticity of Supply
Elasticity of supply measures how responsive the quantity supplied of a good or service is to a change in price. If supply is elastic, a small change in price leads to a relatively larger change in quantity supplied. In contrast, if supply is inelastic, quantity supplied changes by a smaller proportion than the change in price.
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12 Key excerpts on "Elasticity of Supply"
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 20-3 The Price Elasticity of Supply The price Elasticity of Supply is a measure of how much sellers adjust the quantity of a good or service that they offer for sale when the price of that good changes. The price Elasticity of Supply is the percentage change in the quantity supplied of a good or service divided by the percentage change in the price of that good or service, everything else held constant. The price Elasticity of Supply is usually a positive number because the quantity supplied typically rises when the price rises. Supply is said to be elastic over a price range if the price Elasticity of Supply is greater than 1 over that price range. It is said to be inelastic over a price range if the price Elasticity of Supply is less than 1 over that price range. 20-3a Price Elasticity of Supply and the Shape of the Supply Curve The price Elasticity of Supply is either zero or a positive number. A positive price Elasticity of Supply means that as the price of an item rises, the quantity supplied rises. The price Elasticity of Supply is zero for goods whose quantities cannot change. This is illustrated in Figure 4(a), where supply is a vertical line. Land surface, Monet paintings, Beethoven symphonies, and John Lennon’s songs are all fixed in quantity. Because Monet, Beethoven, and John Lennon are dead, no matter what happens to price, the quantity of their products cannot change. Figure 4(b) shows a perfectly elastic supply curve, a horizontal line. The horizontal line means that the quantity supplied can be any amount at the existing price. It is difficult to pro-vide an example of a good with a perfectly elastic supply.
- Berkeley Hill(Author)
- 2013(Publication Date)
- Pergamon(Publisher)
It is defined by the following formula: PRICE Elasticity of Supply PERCENTAGE CHANGE IN QUANTITY SUPPLIED : OF COMMODITY A PERCENTAGE CHANGE IN PRICE OF A Demand and Supply 65 The word price is often dropped from the title. Usually the Elasticity of Supply is a positive figure. (It is only negative when the quantity supplied increases when prices fall.) For some commodities the quantity supplied is extremely responsive to price changes. Such supply is called Elastic and the E$p would be high. Where changes in supply occur without any change in price being necessary, supply is called infinitely elastic. An example might be an ice cream seller at the seaside; within a given range of quantities he is FIG. 3.14 The Effects on Price and Quantity Demanded and Supplied when a Shift in the Demand Curve Occurs (i) Infinitely elastic supply (ii) (Intermediate case) Quantity demanded and supplied of good A Quantity demanded and supplied of good A (in) Completely inelastic supply Quantity demanded and supplied of good A 66 An Introduction to Economics for Students of Agriculture willing to sell as much or as little as buyers want without changing his prices. At the other extreme, the quantity supplied is very unresponsive, possibly totally unresponsive, to price changes. An example is Cup Final tickets; once the arena has been sold out, however high the black market price rises, no more seating spaces can be supplied. In such a situation, supply is completely inelastic. Fig. 3.14 shows what happens when a change in demand, caused perhaps by an increase in consumers' incomes, meets supply situations of infinitely elastic supply (i), completely inelastic supply (iii) and an intermediate case (ii). With an infinitely elastic supply no price increase occurs and the quantity which changes hands increases; with completely inelastic supply the price increases but no increase in quantity results, and in the intermediate case both the price and the quantity sold increases.
eBook - PDFMicroeconomics
Theory and Applications
- Edgar K. Browning, Mark A. Zupan(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
At the opposite extreme, if supply is entirely unresponsive to price, the supply curve is vertical and the Elasticity of Supply is equal to zero. For example, no matter how high the price gets, it is impossible to produce more original Picasso paintings (although several imposters have attempted to copy the dead artist’s style and pass off the result as Picasso originals). The responsiveness of the quantity of Picasso paintings supplied to increases (or decreases) in the price of Picasso paintings is thus zero. cross-price elasticity of demand a measure of how responsive consumption of one good is to a change in the price of a related good price Elasticity of Supply a measure of the responsiveness of the quantity supplied of a commodity to a change in the commodity’s own price 38 Chapter Two • Supply and Demand • Finally, as in the case of elasticity of demand, when the ratio of the percentage change in quantity supplied to the percentage change in price is greater than unity, we say that supply is elastic. When supply is elastic, an increase in price produces a more than proportionate increase in quantity supplied. When the Elasticity of Supply is less than unity, supply is inelastic and a higher price produces a less than proportionate increase in quantity supplied. When the ratio equals unity, supply is unit elastic and a higher price produces a propor- tionate increase in quantity supplied. • Most economic issues involve the workings of individual markets. • In the supply–demand model, we analyze the behavior of buyers by using the demand curve. • The demand curve shows how much people will pur- chase at different prices when other factors that affect purchases are held constant. The demand curve slopes downward, reflecting the law of demand. • Analysis of the seller side of the market relies on the supply curve, which shows the amount that firms will offer for sale at different prices, other factors being constant.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2015(Publication Date)
- Openstax(Publisher)
On the supply side of markets, producers of goods and services typically find it easier to expand production in the long term of several years rather than in the short run of a few months. After all, in the short run it can be costly or difficult to build a new factory, hire many new workers, or open new stores. But over a few years, all of these are possible. Indeed, in most markets for goods and services, prices bounce up and down more than quantities in the short run, but quantities often move more than prices in the long run. The underlying reason for this pattern is that supply and demand are often inelastic in the short run, so that shifts in either demand or supply can cause a relatively greater change in prices. But since supply and demand are more elastic in the long run, the long-run movements in prices are more muted, while quantity adjusts more easily in the long run. 118 Chapter 5 | Elasticity This OpenStax book is available for free at http://cnx.org/content/col11858/1.4 5.4 | Elasticity in Areas Other Than Price By the end of this section, you will be able to: • Calculate the income elasticity of demand and the cross-price elasticity of demand • Calculate the elasticity in labor and financial capital markets through an understanding of the elasticity of labor supply and the elasticity of savings • Apply concepts of price elasticity to real-world situations The basic idea of elasticity—how a percentage change in one variable causes a percentage change in another variable—does not just apply to the responsiveness of supply and demand to changes in the price of a product. Recall that quantity demanded (Qd) depends on income, tastes and preferences, the prices of related goods, and so on, as well as price. Similarly, quantity supplied (Qs) depends on the cost of production, and so on, as well as price. Elasticity can be measured for any determinant of supply and demand, not just the price.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2014(Publication Date)
- Openstax(Publisher)
On the supply side of markets, producers of goods and services typically find it easier to expand production in the long term of several years rather than in the short run of a few months. After all, in the short run it can be costly or difficult to build a new factory, hire many new workers, or open new stores. But over a few years, all of these are possible. Indeed, in most markets for goods and services, prices bounce up and down more than quantities in the short run, but quantities often move more than prices in the long run. The underlying reason for this pattern is that supply and demand are often inelastic in the short run, so that shifts in either demand or supply can cause a relatively greater change in prices. But since supply and demand are more elastic in the long run, the long-run movements in prices are more muted, while quantity adjusts more easily in the long run. 118 Chapter 5 | Elasticity This OpenStax book is available for free at http://cnx.org/content/col11626/1.10 5.4 | Elasticity in Areas Other Than Price By the end of this section, you will be able to: • Calculate the income elasticity of demand and the cross-price elasticity of demand • Calculate the elasticity in labor and financial capital markets through an understanding of the elasticity of labor supply and the elasticity of savings • Apply concepts of price elasticity to real-world situations The basic idea of elasticity—how a percentage change in one variable causes a percentage change in another variable—does not just apply to the responsiveness of supply and demand to changes in the price of a product. Recall that quantity demanded (Qd) depends on income, tastes and preferences, the prices of related goods, and so on, as well as price. Similarly, quantity supplied (Qs) depends on the cost of production, and so on, as well as price. Elasticity can be measured for any determinant of supply and demand, not just the price.
Available until 25 Jan |Learn more- Rob Dransfield(Author)
- 2013(Publication Date)
- Taylor & Francis(Publisher)
Price elasticity of demand – measures the percentage change in quantity demanded caused by a percentage change in price. As such, it measures the extent of movement along the demand curve.Price Elasticity of Supply – measures how the amount of a good firms wish to supply changes in response to a change in price. Price Elasticity of Supply captures the extent of movement along the supply curve.In the analysis that follows we will first review elasticity of demand before going on to examine Elasticity of Supply. Business managers are particularly interested in the extent to which demand is likely to respond to a price change. Measuring the response is referred to as the measurement of price elasticity. In addition, it is helpful to measure the responsiveness of demand to variables other than price – for example:- The responsiveness of demand for a good to changes in the prices of other goods – referred to by economists as cross-price elasticity.
- The responsiveness of demand for a good to changes in income – referred to by economists as income elasticity.
A restaurant owner who is considering increasing prices will first want to know what teffect this will have on the customers. Will there be no effect, a small fall in customers, or a large fall? If the number of customers remains the same or falls by a smaller percentage than the price change, the business will make more revenue. The calculation used to estimate this effect is price elasticity of demand, which measures how quantity demanded for a product responds to a change in its price. Anyone wishing to raise or lower prices should first estimate the price elasticity.Measuring price elasticity Key TermPrice elasticity
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Elasticity mea-sures the willingness and ability of buyers and sellers to alter their behavior in response to changes in their economic circumstances . Firms try to estimate the price elasticity of demand for their products. Governments also have an ongoing interest in various elasticities. For example, state governments want to know the effect of an increase in the sales tax on total tax receipts, and local governments want to know how an increase in income affects the demand for real estate and thus the revenue generated by a given property tax rate. International groups are interested in elasticities; for example, OPEC is concerned about the price elasticity of demand for oil—in the short run and in the long run. Because a corporation often produces an entire line of products, it also has a special interest in cross-price elasticities. Some corporate economists estimate elastici-ties for a living. The appendix to this chapter shows how price elasticities of demand and supply shed light on who ultimately pays a tax. 1. The price elasticities of demand and supply show how respon-sive buyers and sellers are to price changes. More elastic means more responsive. 2. When the percentage change in quantity demanded exceeds the percentage change in price, demand is price elastic. If demand is price elastic, a price increase reduces total revenue and a price decrease increases total revenue. When the percentage change in quantity demanded is less than the percentage change in price, demand is price inelastic. If demand is price inelastic, a higher price increases total revenue and a lower price reduces total rev-enue. When the percentage change in quantity demanded equals the percentage change in price, demand is unit elastic. In that case, a price change does not affect total revenue. 3. Along a straight-lined, downward-sloping demand curve, the price elasticity of demand declines steadily as the price falls.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
5-3 Price Elasticity of Supply Prices signal both sides of the market about the relative scarcity of products. Higher prices discourage consumption but encourage production. Lower prices encourage con- sumption but discourage production. The price elasticity of demand measures how Product Short Run Long Run Cigarettes (among adults) — 0.4 Electricity (residential) 0.1 1.9 Air travel 0.1 2.4 Beer 0.3 — Medical care and hospitalization 0.3 0.9 Gasoline 0.4 1.5 Milk 0.4 — Fish (cod) 0.5 — Wine 0.7 1.2 Movies 0.9 3.7 Natural gas (residential) 1.4 2.1 Automobiles 1.9 2.2 Chevrolets — 4.0 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 5 Elasticity of Demand and Supply 103 responsive consumers are to a price change. Likewise, the price Elasticity of Supply mea- sures how responsive producers are to a price change. Supply elasticity is calculated in the same way as demand elasticity. In simplest terms, the price Elasticity of Supply equals the percentage change in quantity supplied divided by the percentage change in price. Because a higher price usually increases quantity supplied, the percentage change in price and the percentage change in quantity supplied move in the same direction, so the price Elasticity of Supply is usually a positive number. Exhibit 7 depicts a typical upward-sloping supply curve. As you can see, if price increases from p to p9, quantity supplied increases from q to q9. Price and quantity supplied move in the same direction. Let’s look at the elasticity formula for the supply curve.
eBook - PDF- Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Brian Roach, Mariano Torras, Jonathan Harris, Julie Nelson(Authors)
- 2019(Publication Date)
- Routledge(Publisher)
If the price Elasticity of Supply is less than 1, we would say the supply curve is price inelastic. A price Elasticity of Supply equal to 1 is “unit elastic.” A perfectly inelastic supply curve is vertical and indicates that supply is completely fixed. The sup -ply of authentic 1940 Chevrolets, for example, can no longer be increased, no matter what the price. A perfectly elastic supply curve is horizontal, indicating that buyers can buy all they want at the going price. As individual consumers, for example, each of us makes up such a small part of the total market for things like supermarket groceries and mass-produced clothing that such a horizontal curve is a rea-sonable representation of what we face. We generally pay the same price, no matter how many units we buy of a good. Hundreds of economic studies have estimated the elasticity of demand, but relatively few estimate the Elasticity of Supply. Several studies have estimated the Elasticity of Supply for housing, primarily in the United States. The results indicate that the supply of housing is normally, but not always, price elas-tic. Estimates of the Elasticity of Supply for housing range from below 1.0 (inelastic) to as much as 30 or higher. 11 The Elasticity of Supply for labor, however, is generally found to be price inelastic. The U.S. Congressional Budget Office uses a value of 0.40 for the Elasticity of Supply for labor in its analyses. 12 Discussion Questions 1. Suppose that a government alternative-energy program is having difficulty hiring enough engineers to work on a project, and so it raises the wage that it offers to pay by 15 percent. Who are the buyers in this case? Who are the sellers? How would we show the wage increase on a supply-and-demand graph? If the program finds that employment applications increase by 30 percent with the higher wage, what can you conclude about the price Elasticity of Supply of engineering labor? 2.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
percentage change in the quantity demanded or supplied percentage change in the quantity demanded of a good or service divided the percentage change in price percentage change in the quantity supplied divided by the percentage change in price manner in which the tax burden is divided between buyers and sellers when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied the percentage change in hours worked divided by the percentage change in wages the highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearance Chapter 5 | Elasticity 127 KEY CONCEPTS AND SUMMARY 5.1 Price Elasticity of Demand and Price Elasticity of Supply Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. We compute it as the percentage change in quantity demanded (or supplied) divided by the percentage change in price. We can describe elasticity as elastic (or very responsive), unit elastic, or inelastic (not very responsive). Elastic demand or supply curves indicate that quantity demanded or supplied respond to price changes in a greater than proportional manner. An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied. A unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied. 5.2 Polar Cases of Elasticity and Constant Elasticity Infinite or perfect elasticity refers to the extreme case where either the quantity demanded or supplied changes by an infinite amount in response to any change in price at all.
- Luther Tweeten(Author)
- 2019(Publication Date)
- Routledge(Publisher)
The elasticity E shows the percentage change in one variable associated with the percentage change in another variable and hence is independent of the units of measurement. For example, the own-price Elasticity of Supply response is Supply and Elasticity Estimation 15 the cross-price elasticity for related commodities is E .. _ LOi I LPj _ dOi Ptr· _ d In Oi 1 J -O· P· -dP· · -d ln P· ' 1 J J 1 J and the elasticity of response to input prices is LOi LW dOi W d In Oi Eiw = Oi I W = dW Oi = d In W ' where L is the change in price or quantity and d refers to a very small change. Elasticities are frequently measured at the mean of price and quantity. In theory, the sum of these elasticities is zero. That is, a proportional increase in all prices does not change output if farmers react to real (relative) prices as shown in equation 5.1 rather than to absolute (nominal) prices. Expectation Models Supply response elasticities can be estimated empirically by multiple regression statistical analysis utilizing data over time on the variables in equation 5.1. In doing so, it is important to recognize that when producers plant they ordinarily do not know what actual price will be when they sell their commodity. They plan based on expected prices. Numerous functional forms have been used to represent producers' expectations which cannot be observed directly.
eBook - ePubThe Industrial System (Routledge Revivals)
An Inquiry into Earned and Unearned Income
- J. Hobson(Author)
- 2013(Publication Date)
- Taylor & Francis(Publisher)
in the amount of money consumers are willing and able to pay for a supply of goods at the current price, will, through causing a larger or a smaller supply to be produced, alter the methods of production, the positive and relative amounts of the various factors of production, and the prices that are paid per unit for their use, so raising and lowering the margins of employment, extensive and intensive, of each factor. Still more important are the influences which the rise or fall of demand prices for staple materials of manufacture exert upon the structure of whole groups of trades, and so upon the supply prices of the goods they make. The rise of demand prices for such articles as copper, rubber, oil, paper, leather, due to new or increased demands for electric apparatus, motors, cheap literature, &c., have altered the economic and even the political administration of whole provinces. § 6.—The Elasticity of Supply, i.e. the response which expenses of production make to a rise or a fall of demand at previous prices, is much less calculable than the elasticity of demand. For, whereas the latter commonly depends upon the gradual action of large bodies of consumers altering their habits of consumption, the former is usually achieved by quick changes in methods of production spreading rapidly over whole trades of producers. Production is normally less conservative than consumption, and is more alert to seize and adopt new economies. For though habits of industry make for themselves deep grooves, and labour, capital, and ability, being specialised in certain methods, resist innovations which, however beneficial in the long run, involve present trouble and loss, competition forces reforms
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