Price Elasticity of Supply

Factors affecting supply elasticity in the long run.

• In the long run, firms can build new factories, or new firms may be able to enter the market.

• Supply elasticity is always constant regardless of time.

• In the long run, supply becomes perfectly inelastic.

• Firms can only reduce production in the long run.

Graph showing inelastic supply

• The graph illustrates that when price (P) rises by 10%, the quantity supplied (Q) rises by less than 10%.

• The graph shows that when price (P) rises by 10%, the quantity supplied (Q) rises by exactly 10%.

• The graph indicates that when price (P) falls by 10%, the quantity supplied (Q) rises by less than 10%.

• The graph demonstrates that when price (P) rises by 10%, the quantity supplied (Q) remains unchanged.

Price elasticity of supply formula

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• @@rac{ ext{Change in quantity supplied}}{ ext{Change in price}}@@

• @@rac{ ext{Percentage change in quantity demanded}}{ ext{Percentage change in price}}@@

Price elasticity of supply

• The measure of how much the quantity supplied of a good responds to a change in the price of that good.

• The degree to which the quantity demanded of a good changes in response to a change in consumer income.

• The responsiveness of the quantity supplied of a good to changes in consumer preferences.

• The relationship between the price of a good and the total revenue generated from its sales.

Effect of a policy aimed at reducing supply

• Increases farmers' income at the cost of consumers.

• Decreases farmers' income while benefiting consumers.

• Has no effect on farmers' income or consumer prices.

• Increases supply and lowers prices for consumers.

Perfectly inelastic supply

• Price elasticity of supply is greater than 1, meaning quantity supplied changes significantly with price changes.

• Price elasticity of supply is 1, meaning quantity supplied changes proportionately with price changes.

• Price elasticity of supply is 0, meaning quantity supplied does not change with price changes.

• Price elasticity of supply is less than 0, meaning quantity supplied decreases as price increases.

When demand is inelastic, an increase in supply leads to

• A large fall in price and a proportionately smaller increase in quantity sold. As a result, revenue falls from $300 to $220.

• A small fall in price and a proportionately larger increase in quantity sold. As a result, revenue increases from $300 to $350.

• No change in price and quantity sold remains the same. Revenue stays constant at $300.

• A large increase in price and a proportionately smaller decrease in quantity sold. As a result, revenue increases from $300 to $400.

Demand is inelastic

• Total revenue falls.

• Total revenue rises.

• Quantity demanded increases.

• Price decreases.

Example of an inelastic good

• Beachfront property is inelastic.

• Luxury cars are inelastic.

• Fast food is inelastic.

• Clothing is inelastic.

Graph showing unit elastic supply

• A 10% increase in price (P) results in a 5% increase in quantity supplied (Q).

• A 10% increase in price (P) results in a 10% increase in quantity supplied (Q).

• A 10% increase in price (P) results in a 15% increase in quantity supplied (Q).

• A 10% increase in price (P) results in no change in quantity supplied (Q).