Chapter 6-4 Price Elasticity of Supply. Copyright © Houghton Mifflin Company. All rights reserved. 6 | 2 Copyright © Houghton Mifflin Company. All rights.

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Presentation transcript:

Chapter 6-4 Price Elasticity of Supply

Copyright © Houghton Mifflin Company. All rights reserved. 6 | 2 Copyright © Houghton Mifflin Company. All rights reserved. 6 | 2 Price Elasticity The price elasticity of supply is the proportional change in quantity demanded relative to the proportional change in price.

Copyright © Houghton Mifflin Company. All rights reserved. 6 | 3 Copyright © Houghton Mifflin Company. All rights reserved. 6 | 3 The Price Elasticity of Supply The price elasticity of supply is the percentage change in the quantity supplied divided by the percentage change in price.

Copyright © Houghton Mifflin Company. All rights reserved. 6 | 4 Copyright © Houghton Mifflin Company. All rights reserved. 6 | 4 Elastic Supply Elastic supply means that quantity changes by a greater percentage than the percentage change in price.

Copyright © Houghton Mifflin Company. All rights reserved. 6 | 5 Copyright © Houghton Mifflin Company. All rights reserved. 6 | 5 Inelastic Supply Inelastic supply means that quantity doesn't change much with a change in price.

Copyright © Houghton Mifflin Company. All rights reserved. 6 | 6 Copyright © Houghton Mifflin Company. All rights reserved. 6 | 6 Price Elasticity of Supply and Shape of Supply Curve The price elasticity of supply is either zero or a positive number. A zero price elasticity of supply means that the quantity supplied will not vary as the price varies. A positive price elasticity of supply means that as the price of an item rises, the quantity supplied rises.

Copyright © Houghton Mifflin Company. All rights reserved. 6 | 7 Copyright © Houghton Mifflin Company. All rights reserved. 6 | 7 Supply Curve Shapes and Elasticity

Copyright © Houghton Mifflin Company. All rights reserved. 6 | 8 Copyright © Houghton Mifflin Company. All rights reserved. 6 | 8 Supply Elasticities in the Long and Short Runs The shape of the supply curve depends primarily on the length of time being considered.  In the short run, at least one of the resources used in production cannot be changed.  In the long run, the firm has long enough to change any aspect of production, and therefore can more fully respond.

Copyright © Houghton Mifflin Company. All rights reserved. 6 | 9 Copyright © Houghton Mifflin Company. All rights reserved. 6 | 9 Interaction of Price Elasticities of Demand and Supply Both the price elasticity of demand and the price elasticity of supply determine the full effect of a price change.

Copyright © Houghton Mifflin Company. All rights reserved. 6 | 10 Copyright © Houghton Mifflin Company. All rights reserved. 6 | 10 Interaction of Elasticities If the price elasticity of supply of an item is large and the demand for it is price inelastic, then the firm can raise the price without losing revenue.

Copyright © Houghton Mifflin Company. All rights reserved. 6 | 11 Copyright © Houghton Mifflin Company. All rights reserved. 6 | 11 Interaction of Elasticities Conversely, if the price elasticity of supply is small and the price elasticity of demand is large, then the firm is unable to raise the price because the consumer will switch to another firm or product

Copyright © Houghton Mifflin Company. All rights reserved. 6 | 12 Copyright © Houghton Mifflin Company. All rights reserved. 6 | 12 Incidence and Taxes Incidence is the measure of who actually pays for a cost increase or a tax. In general, the more elastic the demand and the less elastic the supply the more the incidence of a tax falls on businesses and the less it falls on consumers. If interested there are more detailed lecture notes available at

Copyright © Houghton Mifflin Company. All rights reserved. 6 | 13 Copyright © Houghton Mifflin Company. All rights reserved. 6 | 13 Elasticity and Shifting Supply and Demand The more elastic the demand (supply), the greater the effect of a supply (demand) shift on quantity, and the smaller the effect on price.

Copyright © Houghton Mifflin Company. All rights reserved. 6 | 14 Copyright © Houghton Mifflin Company. All rights reserved. 6 | 14 Effects of Shifts in Supply on Price and Quantity P0P0 P1P1 D Price Quantity S0S0 S1S1 Q0Q0 Q1Q1 P0P0 P1P1 D Price Quantity S0S0 S1S1 Q0Q0 Q1Q1 Inelastic DemandElastic Demand