Applied economics- Chapter 5- Elasticities
Elasticity- a measure of the responsiveness of quantity demanded or quantity supplied to one of
its determinants
THE PRICE ELASTICITY OF SUPPLY
Price elasticity of supply- measures how much the quantity supplied of particular good changes
when there is a change in price of that good
- it is computed as the percantage change in quantity supplied divided by
the percentage change in price
The determinants of Price Elasticity of Supply
1. The time period
Over very short periods of time, rms may nd it impossible to respond to a change in price by
changing output. In the short run rms cannot easily change the size of their factories or
productive capacity to make more or less of a good but may have some exibility.
Overall, in the short run, the quantity supplied is not very responsive to the price.
Supply is usually more elastic in the long run (in the short-run rms cannot easily change
productive capacity)
By contrast, over longer periods, rms can build new factories or close old ones, hire new sta
and buy in more capital and equipment. In addition, new rms can enter a market and old rms
can shut down. Thus, in the long run, the quantity supplied can respond substantially to
price changes.
The longer time period considered the more elastic the supply will be.
2. Productive capacity
Products where capacity can be easily added an reduced have an elastic supply whereas
products where its di cult to increase or decrease capacity have inelastic supply.
3. The size of the rm/industry
Supply is more elastic in smaller rms
4. The mobility of factor of production
When the mobility of the factors of production is relatively high PES is more elastic. For example it
is easier for a farmer to plant di erent seeds on its land when the price of particular plant
increases that for the doctor how is an oncologist to switch to being gynecologist when the pay
for gynecologist rises.
5. Ease of storing stock
In industries where invenory build-up is relatively easy and cheap, the price elasticity of supply is
more elastic than in industries where it is much harder to do this. Consider the fresh fruit industry,
for example. Storing fresh fruit is not easy because it is perishable and so the price elasicity of
supply in this industry may be more inelastic. Supply is more elastic for rms that can stock
Calculating the Price Elasticity of Supply
The mid point method
Formula :
fi ffi fffififi fi fi fi flfi fi ff
, For example, suppose that an increase in the price of milk from €2.85 to €3.15 a litre raises the
amount that dairy farmers produce from 90 000 to 110 000 litres per month. Using the midpoint
method, we calculate the percentage change in price as:
Similarly, we calculate the percentage change in quantity supplied as:
In this case, the price elasticity of supply is:
In this example, the elasticity of 2 re ects the fact that the quantity supplied moves
proportionately twice as much as the price.
Range of Price Elasticity of Supply
1. Inelastic Supply (PES is less than 1)
2. Elastic Supply (PES is greater than 1)
fl
Elasticity- a measure of the responsiveness of quantity demanded or quantity supplied to one of
its determinants
THE PRICE ELASTICITY OF SUPPLY
Price elasticity of supply- measures how much the quantity supplied of particular good changes
when there is a change in price of that good
- it is computed as the percantage change in quantity supplied divided by
the percentage change in price
The determinants of Price Elasticity of Supply
1. The time period
Over very short periods of time, rms may nd it impossible to respond to a change in price by
changing output. In the short run rms cannot easily change the size of their factories or
productive capacity to make more or less of a good but may have some exibility.
Overall, in the short run, the quantity supplied is not very responsive to the price.
Supply is usually more elastic in the long run (in the short-run rms cannot easily change
productive capacity)
By contrast, over longer periods, rms can build new factories or close old ones, hire new sta
and buy in more capital and equipment. In addition, new rms can enter a market and old rms
can shut down. Thus, in the long run, the quantity supplied can respond substantially to
price changes.
The longer time period considered the more elastic the supply will be.
2. Productive capacity
Products where capacity can be easily added an reduced have an elastic supply whereas
products where its di cult to increase or decrease capacity have inelastic supply.
3. The size of the rm/industry
Supply is more elastic in smaller rms
4. The mobility of factor of production
When the mobility of the factors of production is relatively high PES is more elastic. For example it
is easier for a farmer to plant di erent seeds on its land when the price of particular plant
increases that for the doctor how is an oncologist to switch to being gynecologist when the pay
for gynecologist rises.
5. Ease of storing stock
In industries where invenory build-up is relatively easy and cheap, the price elasticity of supply is
more elastic than in industries where it is much harder to do this. Consider the fresh fruit industry,
for example. Storing fresh fruit is not easy because it is perishable and so the price elasicity of
supply in this industry may be more inelastic. Supply is more elastic for rms that can stock
Calculating the Price Elasticity of Supply
The mid point method
Formula :
fi ffi fffififi fi fi fi flfi fi ff
, For example, suppose that an increase in the price of milk from €2.85 to €3.15 a litre raises the
amount that dairy farmers produce from 90 000 to 110 000 litres per month. Using the midpoint
method, we calculate the percentage change in price as:
Similarly, we calculate the percentage change in quantity supplied as:
In this case, the price elasticity of supply is:
In this example, the elasticity of 2 re ects the fact that the quantity supplied moves
proportionately twice as much as the price.
Range of Price Elasticity of Supply
1. Inelastic Supply (PES is less than 1)
2. Elastic Supply (PES is greater than 1)
fl
