Tutorial 4: Elasticity (cont.)
Price elasticity
of supply
Price elasticity of supply (Eps)
measures how responsive the quantity supplied is to a change
in product price. Mathematically:
The term ( ),
measures the slope of the supply curve, and the term
(P/Q) measures the price (P) and quantity
(Q) values for a point on that supply curve.
If we write the equation for supply as Q(P) = c
+ d*P, then
Eps = d*(P/Q) where d
> 0.
Similarly, if we write the equation for supply
in inverse form, P(Q) = (c/d) + (1/d)*Q,
then
Eps = (1/d)*(P/Q) where
d > 0.
These latter forms of the equation for price
elasticity of supply are referred to as the point-slope
formulae. Because d > 0 (do you know why?), Eps
> 0 as well.
Determinants
of price elasticity of supply 
So far we have learned two ways to calculate
price elasticity of supply:
- using numerical data, as the ratio of the percentage
changes in Q and P;
- using the known equation for supply (or inverse supply),
as the product of the slope coefficient and the ratio
of the price and quantity values for a point on
that supply curve.
But what if we have neither the numerical data
nor an equation describing demand? One can still get a feeling
for how responsive sellers will be to a price change by
remembering the four determinants of seller responsiveness:
- Storage costs;
- Time;
- Adaptability of the production process;
- Resource costs.
The cost of storing goods
in inventory affects the size of a firm's responsiveness
to a change in price. If goods are inexpensive to store,
then sellers will be very responsive to a price change because
they can cheaply hold a larger inventory of goods. If it
is quite costly to store goods, then sellers will not be
very responsive to a price change because they are likely
to have a small inventory of goods on hand.
The amount of time firms have
to respond to a price change affects the size of that response.
For most goods, in the short run, sellers are limited to
their current production capacity. They can almost always
offer more for sale by working more shifts, for example,
but the size of their response is limited. So in the short
run, supply tends to be price inelastic. [In the immediate
period, supply tends to perfectly price inelastic;
right now, a seller is limited to stock on hand and often
is not able to offer any more for sale as a result of an
increase in price.] Given time, however, firms can expand
their production capacity and produce a greater quantity
of goods per period. So in the long run, supply tends to
be price elastic.
The adaptability of the production process
also affects how responsive a firm can be to an increase
in price. If the production process can easily be changed,
then the size of the firm's response will be greater than
when it takes years to change how it produces goods.
If resource costs are high,
then an increase in output will be very expensive for a
firm. As a result, the firm will not be as responsive to
an increase in price as they would if resource costs are
lower.
| Now it's time to
"do the thing".
Click on the following link
to download the Price
Elasticity Workbook. Work through General
Question 7and Excel Question 11 to improve
your understanding of price elasticity of
supply.
Return here when you have finished.
Need help
downloading the Excel file? |
|
Continues... 
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