Price Elasticity of Supply Can you… Define and calculate it? Describe what determines it? IGCSE ECONOMICS

What is it What shape is the Supply curve? Is it… P S2 S1 S3 Q IGCSE ECONOMICS

Elasticity The slope of the curve shows its elasticity* It is calculated by: % change in quantity Supplied % change in price *This is not strictly speaking true, but will do to start with. IGCSE ECONOMICS

What is it? It is “How responsive Supply is to a change in price.” SO, when price changes, does the amount firms supply change by only a little or is it by a lot? IGCSE ECONOMICS

Interpreting our results If you have an answer > 1, then Supply is very sensitive to price, this means a small change in price leads to a BIG change in the amount that firms wish to supply Supply is said to be PRICE ELASTIC. IGCSE ECONOMICS

Interpreting our results If you have an answer < 1, then supply is very in-sensitive to price, this means a BIG change in price leads to only a small change in the amount firms produce Supply is said to be PRICE INELASTIC. IGCSE ECONOMICS

Interpreting our results If you have an answer = 1, then supply is said to have unitary elasticity. Price and supply change in the same proportions. IGCSE ECONOMICS

At the extremes It is possible to get an answer of 0. This is called Perfectly inelastic demand What will happen to demand if price is raised by any amount? IGCSE ECONOMICS

At the extremes It is possible to get an answer of infinity. This is called Perfectly elastic Supply What will happen to supply if price is raised by any amount? IGCSE ECONOMICS

Now, try the worked examples from the worksheet. IGCSE ECONOMICS

What makes Supply more elastic? Availability of substitutes* Time *Take care with what you mean by ‘substitutes’ here. IGCSE ECONOMICS

INCOME ELASTICITY of DEMAND You know what PRICE elasticity of demand is. What do you think INCOME elasticity of demand is? What sort of goods are income elastic and which are income inelastic IGCSE ECONOMICS

Cross elasticity of demand Shows how responsive demand for one good is, when the price of another changes. % change in demand for good X % change in price of good Y This time whether the change is positive or negative IS important. IGCSE ECONOMICS

What our results show If the answer is positive, then the goods are SUBSTITUTES The larger the answer then the closer substitutes they are IGCSE ECONOMICS

Interpreting our results If the answer is negative then the two goods are compliments. The bigger the magnitude of the number, then the stronger the link between them. IGCSE ECONOMICS

Interpreting our results The closer the answer is to zero, then the weaker any link between the two is. IGCSE ECONOMICS

Questions One of the exam papers (P1) requires you to answer multi choice style question. This means we need to practice this! Answer the questions on the multi choice sheet. IGCSE ECONOMICS