ECON1101 Chapter 3: Price Elasticity of Supply
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.
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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.
1.
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.
2.
Inventories/excess capacity: The larger the amount of inventories and excess
capacity, the higher the elasticity.
3.
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.
4.
Price Elasticity of Supply
Sunday, 8 April 2018
3:20 pm
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.