Elasticity of Supply

Guiding Questions

• What is the difference between elastic supply and inelastic supply?

• What makes a good or service have elastic or inelastic supply?

THE ELASTICITY OF SUPPLY• The elasticity of supply is a

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

Elastic vs. Inelastic Supply

– (1) When supply is elastic, producers can increase production without a rise in cost or a time delay

– (2) When supply is inelastic, firms find it hard to change their production levels in a given time period.

Brainstorming with the idea of elasticity of supply

What factors do you think will make supply of a good/service elastic? That is, what factors make it easy for suppliers to increase supply of their product without a rise in cost or time delay?

What factors do you think will make supply of a good/service inelastic? That is, what factors make it hard for suppliers to increase supply of their product without a rise in cost or time delay?

Need to think from the business

perspective!

What Determines Supply Elasticity?1. Ability of Suppliers to change production• Factor substitution possibilities

– Can the factors of production be switched easily when there is a change in demand?• When factor substitution is possible and

can be achieved at low cost, supply will be elastic

• When factors are highly specialized, substitution may be harder and thus supply will be inelastic

• Resources are cheap and quick to come by

Determinants of Elasticity of Supply

2. The time frame allowed– Momentary period (fixed supply)– Short run (inelastic supply)– Long run (elastic supply)

Decide on the PeS

Football stadium Fresh salmon oil

Flu shots New houses

Reminder:PeS shows whether firms can respond to a rise in

price by increasing their supply

Elastic = easy to increase Supply without cost and

time issues.

Inelastic = harder to change supply

Figure 6 The Price Elasticity of Supply

Copyright©2003 Southwestern/Thomson Learning

(b) Inelastic Supply

110

$5

100

4

Quantity0

Price

2. . . . leads to a small increase in quantity supplied.

Supply

Figure 6 The Price Elasticity of Supply

Copyright©2003 Southwestern/Thomson Learning

(d) Elastic Supply

Quantity0

Price

2. . . . leads to a large increase in quantity supplied.

4

100

$5

200

Supply

Decide in each of the following cases a. whether supply is likely to be elastic or inelasticb. Whyc. Draw an approximate supply curve based on your decision

• Pork (2 months time frame)• Paper clips (1 month time frame)• Fresh strawberries (in summer) • Neck ties (1 week time frame)• Canned peas (1 month time frame)• Aeroplanes (1 month time frame)• World Series shirts (1 month time

frame)