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Understanding Price Elasticity of Supply
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Welcome everyone! Today we will explore the concept known as price elasticity of supply. Can anyone tell me what they think it means?
Is it how much the quantity supplied changes when there is a price change?
Exactly! Price elasticity of supply measures the responsiveness of quantity supplied to changes in price. Now, if the quantity supplied increased significantly when prices rose, would that imply a high or low elasticity?
High elasticity, right?
That's correct! High elasticity means that suppliers are very responsive to price changes. To formulate this, we use the equation e<sub>S</sub> = % change in quantity supplied divided by % change in price. Does anyone want to try calculating the elasticity using some numbers?
Sure! If the price goes from Rs 10 to Rs 30 and the quantity supplied goes from 200 to 1000, how would I calculate that?
Good question! First, you'll work out the changes: we have \( \Delta Q = 1000 - 200 \) and \( \Delta P = 30 - 10 \). Can anyone tell me the percentage changes now?
I think the percentage change in quantity is 400% and the percentage change in price is 200%.
Fantastic! Now using our formula, what do you think the price elasticity of supply would be?
That would be 2!
Great job! You all see how we apply the concept. Let’s summarize: price elasticity of supply measures responsiveness. It can vary based on the price and quantity relationship.
Geometric Interpretation of Supply Elasticity
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Now let’s delve into the geometric interpretation. What do you notice about different points on a straight line supply curve?
I think the elasticity varies. Some points might be more elastic than others.
Exactly! At higher prices, the elasticity can be less than 1, greater than 1, or even equal to 1. For example, if we are at point 'S' on the supply curve, we can draw a tangent to evaluate the elasticity. Does anyone remember how we calculate it geometrically?
We determine the slope of the supply curve at that point!
Correct! The elasticity at any point is given by the formula ratio of the slope of the curve multiplied by the inverse of the quantity over price. If that slope is higher, what does it indicate about elasticity?
It means it's more elastic!
Exactly! The steeper the curve, the less elastic it is. Shall we summarize the key points again?
Introduction & Overview
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Quick Overview
Standard
The price elasticity of supply indicates the percentage change in quantity supplied resulting from a percentage change in price. It is an important concept in understanding how firms adjust their output in response to price changes in perfectly competitive markets.
Detailed
Price Elasticity of Supply
The price elasticity of supply (denoted as eS) evaluates how the quantity of a good supplied changes in response to variations in its price. Specifically, it is expressed mathematically as:
\[ e_S = \frac{% \Delta Q}{% \Delta P} = \frac{\Delta Q/Q}{\Delta P/P} \times 100 \]
Where:
- \( \Delta Q \) is the change in quantity of the good supplied.
- \( \Delta P \) is the change in market price.
For instance, consider the market for cricket balls. If the price rises from Rs 10 to Rs 30 and the quantity supplied increases from 200 to 1000 balls, we can calculate the price elasticity of supply. By determining the percentage changes in both price and quantity, we find that the price elasticity of supply is 2, indicating that supply is relatively responsive to price changes. If the supply curve is vertical, the elasticity is zero, indicating no responsiveness. Conversely, for a positively sloped supply curve, an increase in price results in an increase in supply, thus the elasticity is positive. The section also discusses the geometric method of determining elasticity at various points on a supply curve. Each point on a straight line supply curve will have a different elasticity value, emphasizing the importance of understanding these dynamics in market behavior.
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Definition of Price Elasticity of Supply
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The price elasticity of supply of a good measures the responsiveness of quantity supplied to changes in the price of the good. More specifically, the price elasticity of supply, denoted by eS, is defined as follows:
\[ e_S = \frac{\text{Percentage change in quantity supplied}}{\text{Percentage change in price}} \]
Where ∆Q is the change in quantity of the good supplied to the market as market price changes by ∆P.
Detailed Explanation
Price elasticity of supply gauges how much the quantity of a product supplied by producers changes when the price of that product changes. It is a crucial concept in economics because it helps to determine how responsive producers are to price changes. If suppliers can easily increase production in response to price increases, the elasticity is high. Conversely, if production is constrained, supply is inelastic, meaning it doesn’t change much when prices change.
Examples & Analogies
Imagine you're at a bakery and the price of cupcakes increases from $2 to $4. If the bakery can quickly bake more cupcakes to meet this new demand—because they have plenty of ingredients and staff—then the supply is elastic. However, if it's a busy Saturday morning and the bakers can’t make any more cupcakes quickly due to limited resources, the supply becomes inelastic.
Numerical Example of Price Elasticity of Supply
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Suppose the market for cricket balls is perfectly competitive. When the price of a cricket ball is Rs 10, let us assume that 200 cricket balls are produced in aggregate by the firms in the market. When the price of a cricket ball rises to Rs 30, let us assume that 1,000 cricket balls are produced in aggregate by the firms in the market.
The percentage change in quantity supplied and market price can be estimated using the information summarized in the table below:
| Price of Cricket balls (P) | Quantity of Cricket balls produced and sold (Q) |
|---|---|
| Old price : P = 10 | Old quantity : Q = 200 |
| New price : P = 30 | New quantity : Q = 1,000 |
\[ \text{Percentage change in quantity supplied} = \frac{(1000-200)}{200} \times 100 = 400\% \]
\[ \text{Percentage change in market price} = \frac{(30-10)}{10} \times 100 = 200\% \]
\[ e_S = \frac{400}{200} = 2 \]
Detailed Explanation
In this example, the price elasticity of supply is calculated based on how much the quantity of cricket balls produced changes as the price changes. Initially, when the price of a cricket ball is Rs 10, 200 balls are supplied. When the price rises to Rs 30, the supply jumps to 1,000 balls. The calculation shows a significant increase in supply compared to the increase in price, leading to a price elasticity of supply of 2, indicating that supply is quite responsive to price changes.
Examples & Analogies
Think of a farmer growing apples. If, due to a price increase, the farmer can easily bring in extra labor and add more trees to produce more apples quickly, like this cricket ball example, that’s a high price elasticity of supply. If apples were a perishable good with limited time to sell, then the farmer might have a very elastic response to price changes because he wouldn't want to miss out on potential profits.
Types of Supply Elasticity
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When the supply curve is vertical, supply is completely insensitive to price and the elasticity of supply is zero. In other cases, when supply curve is positively sloped, with a rise in price, supply rises and hence, the elasticity of supply is positive.
Detailed Explanation
The nature of the supply curve gives insight into how responsive quantity supplied is to price changes. A vertical supply curve indicates perfect inelasticity, meaning that no matter the price, the quantity supplied does not change. This could happen with goods that cannot be produced quickly or at all beyond a certain point, like concert tickets—there's only a fixed number available. A positively sloped curve indicates increasing responsiveness as prices rise, which is typical for many goods. The more elastic a good is, the greater the quantity supplied will respond to a change in price.
Examples & Analogies
Consider a concert: if the price of tickets goes up, more seats can't magically appear; hence the supply of tickets is inelastic (a vertical supply curve). However, if you're selling lemonade on a hot day, as the price increases, you can quickly squeeze more lemons and make more lemonade, showing elastic supply behavior (a positively sloped supply curve).
Definitions & Key Concepts
Learn essential terms and foundational ideas that form the basis of the topic.
Key Concepts
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Price Elasticity of Supply: A measure of how the quantity supplied responds to price changes, calculated as the ratio of percentage changes.
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Elastic Supply: Indicates a high responsiveness of supply to price changes (e > 1).
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Inelastic Supply: Indicates a low responsiveness of supply to price changes (e < 1).
Examples & Real-Life Applications
See how the concepts apply in real-world scenarios to understand their practical implications.
Examples
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If the price of apples increases from $1 to $5 and the quantity supplied goes from 100 units to 400 units, the price elasticity of supply is calculated as follows: \((400 - 100) / 100 = 300% \text{ and } (5 - 1) / 1 = 400%\), leading to eS = 300% / 400% = 0.75, which is inelastic.
-
A farmer finds that for quick-growing crops, when the price increases, he can double his supply. If the price rises from $20 to $50, and he raises his output from 200 to 400, the elasticity is calculated as eS = 200% / 150% = 1.33, indicating elasticity.
Memory Aids
Use mnemonics, acronyms, or visual cues to help remember key information more easily.
🎵 Rhymes Time
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When price goes up, supply can bend, in the corner of our economy's trend!
📖 Fascinating Stories
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Once in a market, a baker saw cakes selling fast. When the price rose, they adapted quickly. That's elastic supply!
🧠 Other Memory Gems
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E-P-S = Elasticity - Price - Supply; remember it as 'E' for Elasticity, 'P' for Price, 'S' for Supply.
🎯 Super Acronyms
Remember E-S-P for 'E' in Elastic, 'S' in Supply means the quantity shifts when 'P' - the price - flips!
Flash Cards
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Glossary of Terms
Review the Definitions for terms.
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Term: Price Elasticity of Supply (e<sub>S</sub>)
Definition:
A measure of the responsiveness of the quantity supplied to changes in price.
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Term: Perfectly Elastic Supply
Definition:
Supply that responds infinitely to any price change; represented by a horizontal supply curve.
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Term: Perfectly Inelastic Supply
Definition:
Supply that does not change regardless of price changes; represented by a vertical supply curve.