ECON1101 Chapter 3: Price Elasticity of Supply

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31 May 2018

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Formula for elasticity: (PA = price at point A, PB = price at point B, QA = quantity

supplied at point A, QB = quantity supplied at point B) (Change in Q/QA)/ (Change

in P/PA)

Price elasticity of supply is usually positive due to the fact that price and

quantity tend to move in the same direction.

Elasticity = PA/ QA * 1/slope (gradient)

Price elasticity of Supply: denotes the percentage change in quantity supplied

resulting from a small percentage change in price.

Law of Supply: Tendency of being upward sloping

Elastic supply: Price elasticity of supply is greater than 1

Unit elastic supply: Equal to 1

Inelastic supply: Less than 1

What are the factors that make supply more or less elastic?

Availability of raw materials: The larger the availability of raw materials, the

more elastic supply tends to be. On the other hand, if additional raw

materials are not available, a firm might not be unable to produce more.

Factors mobility: The more mobile the factors of production, the higher the

elasticity. If firm can easily divert its factors of production from one good to

another, then it can rapidly increase production of these goods which happen

to be in demand.

Inventories/excess capacity: The larger the amount of inventories and excess

capacity, the higher the elasticity.

Time horizon: Longer the time horizon, the higher the elasticity tends to be. If

the time horizon is long enough, producers can search for alternative inputs

and revise their production plans more conveniently.

Price Elasticity of Supply

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Document Summary

Formula for elasticity: (pa = price at point a, pb = price at point b, qa = quantity supplied at point a, qb = quantity supplied at point b) (change in q/qa)/ (change in p/pa) Price elasticity of supply is usually positive due to the fact that price and quantity tend to move in the same direction. Price elasticity of supply: denotes the percentage change in quantity supplied resulting from a small percentage change in price. Law of supply: tendency of being upward sloping. Elastic supply: price elasticity of supply is greater than 1. Availability of raw materials: the larger the availability of raw materials, the more elastic supply tends to be. On the other hand, if additional raw materials are not available, a firm might not be unable to produce more. Factors mobility: the more mobile the factors of production, the higher the elasticity.

Related Questions

a. If a 10 percent increase in price decreases the quantity demanded by 12 percent, the price elasticity of demand is ____________.

b. The price of strawberries falls from $1.50 to $1.00 per carton and the quantity demanded goes from 100,000 to 200,000 cartons. Calculate the price elasticity of demand and interpret it in words.

c. At the present level of consumption, 4,000 movie tickets, and at the current price, $5 per ticket, the price elasticity of demand for movie tickets is 1. Calculate the percentage by which the owners of movie theaters must reduce the price in order to sell 5,000 tickets.

d. The price elasticity of demand for ice-cream sandwiches is 1.2 at the current price of $0.50 per sandwich and the current consumption level of 100,000 sandwiches. Calculate the change in the quantity demanded when the price rises by $0.05.

e. Calculate the price elasticity of supply for web-design services when the price per hour rises from $100 to $150 and the number of hours transacted increases from 300,000 to 500,000. Is supply elastic, inelastic, or unit elastic?

crimsonhamster810

Discussion #1

The law of demand states that a fall in the price of a good raises the quantity demanded, and the increase in price leads to a decrease in quantity demanded. The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price, and the percentage change in quantity demanded is greater than the percentage change in price. Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price, which indicates that the percentage in price is greater than the percentage in quantity demanded.

However, the extent of responsiveness of quantity demanded to a change in price depends on the nature of a particular good or service in the market. The price elasticity of demand partly depends on the availability of close substitutes. When a large number of substitutes are available, consumers respond to a higher price of a good by buying more of the substitute goods and less of the relatively more expensive good. In addition, goods or services that are considered necessities tend to have less elastic (more inelastic) demand, whereas goods or services that are considered luxuries have more elastic (less inelastic) demands.

Explain why the demand for the good or service provided by the organization you work for is elastic or inelastic. How does this influence pricing decisions?
Provide examples on how the availability of close substitutes affects price elasticity of demand.
Give specific examples of necessities or luxuries, and explain how they affect price elasticity of goods or services.

Please answer ALL bulletins and place the answers under the correct bulletin.

1. The concept of price elasticity of demand measures:

a. the slope of the demand curve.

b. the number of buyers in a market.

c. the extent to which the demand curve shifts as the result of a price decline.

d. the sensitiveness of quantities demanded to price changes.

2. When the percentage change in price is less than the resulting percentage change in quantity demanded:

a. demand is elastic.

b. demand is inelastic.

c. demand is unit elastic.

d. none of the above.

3. The elasticity of demand:

a. will be the same at each price-quantity combination on a stable demand curve.

b. tends to be elastic in high-price ranges and inelastic in low-price ranges.

c. tends to be inelastic in high-price ranges and elastic in low-price ranges.

d. is infinitely large for a perfectly inelastic demand curve.

4. Suppose that as the price of Y falls from $2.00 to $1.80 the quantity of Y demanded increases from 110 to 121. It can be concluded that the price elasticity of demand is: _______.

5. Total revenue rises as the price of a good increases if price elasticity of demand is:

a. unitary elastic

b. perfectly inelastic.

6. The demand for such products as salt, bread, and electricity tend to be:

a. relatively price elastic.

b. relatively price inelastic.

c. of unit price elasticity.

d. perfectly price elastic.

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ECON1101 Chapter 3: Price Elasticity of Supply

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