Economics
Price Elasticity Of Supply in the Short and Long Run
Price elasticity of supply measures the responsiveness of quantity supplied to a change in price. In the short run, supply tends to be inelastic as it takes time for producers to adjust production levels. In the long run, supply becomes more elastic as producers have more time to adjust factors of production and expand or contract their operations.
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12 Key excerpts on "Price Elasticity Of Supply in the Short and Long Run"
- Luther Tweeten(Author)
- 2019(Publication Date)
- Routledge(Publisher)
If the increase in price is 10 percent and the supply elasticity is .1 in the short run and 1.0 in the long run, supply quantity is predicted to increase by 1.0 percent in the short run and by 10 percent in the long run if the higher price is maintained. If the original quantity q 8 is 150 kilos and the original price p is 20 rupees, the long-run elasticity implies that a price increase of 2 rupees increases quantity 1.5 kilos in the short run and by 15 kilos if the price increase is maintained for several years. If the price is decreased to P2 from the initial price p, the quantity supplied falls to 78 Policy Analysis Tools Price s p 0 Figure 5.1. Illustration of Supply Curve S Cls2· If the real price decrease from p is 20 percent and price is held at that lower level with the supply elasticity as above, the quantity supplied is expected to fall 2.0 percent in one year and 20 percent in many years. Frequently, the analyst desires more information than just the supply response to price. Suppose it is useful to know the contributions of specific resources and of yield and area components to supply response. Supply response to price is a function of the physical response of output to use of inputs and the behavioral response of input use to price, the latter represented by the input elasticity of demand. The physical response of output to inputs is expressed by the production function Supply and Elasticity Estimation 19 Oi = f(X i. Xz, ... ,Xn) (5.12) where X i. Xz, ... , Xn refer to inputs such as fertilizer, pesticides, irrigation water, land, labor, and other inputs. The production elasticity of output Oi with respect to any input Xk is and the elasticity of input demand with respect to product price Pi is E . _ £Xk I £Pi _ dXk Pi _ d In Xk ki -Xk Pi -dPi Xk -d In Pi It has been shown (Tweeten and Quance) that under specified assumptions: The elasticity of output supply is the input demand elasticity multiplied by production elasticity summed over all inputs.
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 - PDFMicroeconomics
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 p 9 , quantity supplied increases from q to q 9 . Price and quantity supplied move in the same direction. Let’s look at the elasticity formula for the supply curve.
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.
Available until 5 Dec |Learn moreEconomic Principles and Problems
A Pluralist Introduction
- Geoffrey Schneider(Author)
- 2021(Publication Date)
- Routledge(Publisher)
Figure 10.18 (b) an increase in demand causes the price to double (increase by 100%) from $2 to $4, but this causes only a small increase of 10% in the quantity of milk supplied (quantity supplied increases from 100 units at point A to 110 units at point B). In this case, the price elasticity of supply can be computed as follows:e s==Δ QQ 1Δ PP 1= 0.1.10 %100 %The supply curve for milk in Figure 10.18 (b) is very inelastic.There are three main determinants of whether or not a supply curve is elastic or inelastic. The price elasticity of supply is determined by (1) productive capacity and the availability of inputs, (2) the cost and availability of storage and shipping, and (3) the time frame.10.8.1 Productive capacity and the availability of inputs
If a firm or an industry has a lot of excess productive capacity, such as if they are not using their factories fully, they can increase production easily when prices increase and the product they are selling becomes more profitable. Similarly, if the inputs that a producer needs to use to produce their product are readily available and can be purchased without a significant increase in costs, then supply will also tend to be more elastic. For example, a pizza company with extra ovens and delivery vehicles could easily expand the number of pizzas it sells by hiring more workers and ordering more dough, cheese, sauce, and toppings from distributors.10.8.2 Cost and availability of storage and shipping
If a firm can maintain a large inventory and if it has access to rapid and inexpensive shipping, it will tend to have an elastic supply curve. Such a firm would be able to increase the quantity of goods offered for sale quickly and easily in response to changes in prices. This has been one of the keys to Amazon’s success. When the demand for a product they are selling increases, they can quickly increase the quantity of the good they offer for sale out of their vast system of warehouses and their inexpensive shipping network. However, a producer with no significant inventory will not be able to increase the quantity supplied quickly when the price increases.10.8.3 Time
As producers have more time to adjust, their supply curve becomes more elastic. A dairy farmer producing milk cannot increase the supply of milk much this year if the price of milk increases. But if milk prices stay high, they can buy or breed more cows, build new barns, grow more cattle feed, and increase their quantity of milk supplied substantially within two years. In general, supply curves tend to be more inelastic in the short run than they are in the long run.
eBook - PDF- Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Brian Roach, Mariano Torras, Jonathan Harris, Julie Nelson(Authors)
- 2019(Publication Date)
- Routledge(Publisher)
Meanwhile, if it takes a considerably higher price to induce suppliers to increase quantity, then we would say the supply curve is price inelastic. The company’s dilemma is illustrated in Figure 5.6 . It is initially able to purchase a quantity of Q 0 of the components at a price of P 0 . Then suppose that it wishes to increase the quantity it purchases to Q 1 . If supply is relatively elastic (represented by the supply curve S e ), it can induce suppliers to increase supply to Q 1 with a price of only P e . However, if supply is relatively inelastic (such as supply curve S i ), price elasticity of supply: a measure of the responsiveness of quantity supplied to changes in price C HAPTER 5 – E LASTICITY 120 it will need to pay a higher price of P i . Obviously, the company needing the components will hope that the supply curve is relatively elastic, such as S e , which means that it will have to pay less to obtain Q 1 . Note that the known starting point, at a price of P 0 and a quantity supplied of Q 0 , lies on both supply curves. The elasticity of supply determines how the curves diverge from the known starting point. Like the equation for the price elasticity of demand, the price elasticity of supply is calculated as: Elasticity Percentage change in quantity supplied Percenta = / ge change in price Given that supply curves normally slope upward, price and quantity supplied change in the same direction and thus we expect that the elasticity of supply will be a positive number. If the price elastic-ity of supply is greater than 1, we would say the supply curve is price elastic. 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.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. 108 Chapter 5 | Elasticity This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 We can usefully divide elasticities into three broad categories: elastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities indicate proportional responsiveness of either demand or supply, as Table 5.1 summarizes. If . . . Then . . . And It Is Called . . . % change in quantity > % change in price % change in quantity % change in price > 1 Elastic % change in quantity = % change in price % change in quantity % change in price = 1 Unitary % change in quantity < % change in price % change in quantity % change in price < 1 Inelastic Table 5.1 Elastic, Inelastic, and Unitary: Three Cases of Elasticity Before we delve into the details of elasticity, enjoy this article (http://openstaxcollege.org/l/Super_Bowl) on elasticity and ticket prices at the Super Bowl. To calculate elasticity along a demand or supply curve economists use the average percent change in both quantity and price.
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
This issue reaches beyond governments and taxes. Every firm faces a similar issue. When a firm considers raising the sales price, it must consider how much a price increase will reduce the quantity demanded of what it sells. Conversely, when a firm puts its products on sale, it must expect (or hope) that the lower price will lead to a significantly higher quantity demanded. 5.1 Price Elasticity of Demand and Price Elasticity of Supply LEARNING OBJECTIVES By the end of this section, you will be able to: • Calculate the price elasticity of demand • Calculate the price elasticity of supply Both the demand and supply curve show the relationship between price and the number of units demanded or supplied. Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price elasticity of demand is the percentage 112 5 • Elasticity Access for free at openstax.org change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. We can usefully divide elasticities into three broad categories: elastic, inelastic, and unitary. Because price and quantity demanded move in opposite directions, price elasticity of demand is always a negative number. Therefore, price elasticity of demand is usually reported as its absolute value, without a negative sign. The summary in Table 5.1 is assuming absolute values for price elasticity of demand. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities indicate proportional responsiveness of either demand or supply, as Table 5.1 summarizes.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2015(Publication Date)
- Openstax(Publisher)
Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. 104 Chapter 5 | Elasticity This OpenStax book is available for free at http://cnx.org/content/col11858/1.4 Elasticities can be usefully divided into three broad categories: elastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities indicate proportional responsiveness of either demand or supply, as summarized in Table 5.1. If . . . Then . . . And It Is Called . . . % change in quantity > % change in price % change in quantity % change in price > 1 Elastic % change in quantity = % change in price % change in quantity % change in price = 1 Unitary % change in quantity < % change in price % change in quantity % change in price < 1 Inelastic Table 5.1 Elastic, Inelastic, and Unitary: Three Cases of Elasticity Before we get into the nitty gritty of elasticity, enjoy this article (http://openstaxcollege.org/l/Super_Bowl) on elasticity and ticket prices at the Super Bowl. To calculate elasticity, instead of using simple percentage changes in quantity and price, economists use the average percent change in both quantity and price.
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 - 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
eBook - PDF- Irvin Tucker(Author)
- 2018(Publication Date)
- Cengage Learning EMEA(Publisher)
If, however, college tuition, the price of dinners at restaurants, or hous-ing prices double, people will look for alternatives. These goods and services account for a large part of people’s budgets. The price elasticity coefficient of demand is directly related to the percentage of one’s budget spent for a good or service. CHECKPOINT EXHIBIT 6 Estimated Price Elasticities of Demand Elasticity Coefficient Item Short Run Long Run Automobiles 1.87 2.24 Chinaware 1.54 2.55 Movies 0.87 3.67 Tires 0.86 1.19 Commuter rail fares 0.62 1.59 Jewelry and watches 0.41 0.67 Medical care 0.31 0.92 housing 0.30 1.88 Gasoline 0.34 0.84 Theater and opera tickets 0.18 0.31 Foreign travel 0.14 1.77 Air travel 0.10 2.40 Sources: Martijn Brons, PeterNijkamp, Eric Pels, and Piet rietveld, A Meta-Analysis of the P rice Elasticity of Gasoline Demand. A SUr App roach,” Energy Economics , Volume 30, Issue 5, September 2008, Pages 2105-2122. robe rt Archibald and robe rt Gillingham, “An Analysis of the Short-run Consumer Demand for Gasoline Using house hold Survey Data,” Review of Economics and Statistics 62 (November 1980): 622–628; hendrik S. hout hakker and Lester D. Taylor, Consumer Demand in the United States: Analyses and Projections (Cambridge, MA:: harvard University Press, 1970, pp. 56–149; richa rd Voith, “The Long-run Elasticity of Demand fo r Commuter rail T ransportation,” Journal of Urban Economics 30 (November 1991): 360–372. Copyright 2019 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.
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