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Elasticity

1

Price Elasticity of Supply

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So now let's discuss how elasticity relates to supply curves. So to now we've been doing a lot of demand curve stuff, but now let's talk about price elasticity of supply and guess what? Pretty much everything we do is gonna be exactly the same. So lucky us, we're still gonna be using our midpoint method here. Um Now we're talking about supply, Right? So the idea here um is that instead of having quantity demanded in the numerator? So look at our our our formula, right? We've got quantity supplied in the numerator, but we still got price in the denominator, right? It's called price elasticity of supply, price in the denominator, right? So this is how does quantity supplied respond to a change in price? Right. How much is that quantity supplied? Gonna change? Is it gonna change a lot when the price goes up? Is it only gonna change a little when the price goes up? Right. So we've got our same shorthand that we've been using here on the right percentage change in quantity supplied over percentage change in price. Right? So really our steps here are gonna be the same as price elasticity of demand, except now we're just using quantity supplied again, just like the price elasticity of demand. Our positives and negatives don't matter in this case because we're always going to get a positive number with quantity supply. Right, remember the law, supply when price goes up, quantity supply goes up. So they're both positive, we're always going to get a positive number signs don't matter. So let's go ahead and do an example here where we're going to calculate price elasticity of supply and it should seem very familiar to you in the steps we're doing. So when the price of ice cream rises from $4 a tub to $6 a tub, the quantity supplied increases from 90,000 to 110,000. What is the price elasticity of supply of ice cream? So we're just gonna use our five steps. There's no sixth step about positive or negative here because it's always positive. Easy peasy. Let's go ahead and do it. So I'm gonna go ahead and circle my quantities here in blue like we've been doing and our prices in green keep everything nice and separate. So I'm gonna have a column here for quantity supplied, right? Not quantity demanded this time And a column for price. So let's start with step one. Where we're going to subtract the two quantities, subtract the two prices, do it the easy way bigger minus smaller because signs don't matter. Okay, 20,000 is our difference price 6 -42. Alright. Step two, we're gonna add. Isn't this nice? How similar all of our calculations have become 1, 10 plus 90 is gonna give us 200,000 and price we've got six plus four equals 10. Step three. We're just gonna divide by two. Our answer from step two, right? 200,000 divided by 200,000. Uh And 10 divided by two equals five. Step four is where we're actually gonna get our percentage changes in each. So for quality supply, that's step one divided by step three uh 20,000, divided by 100,000. That's going to give us 0.2 is our percentage change in quantity supplied in this case. Right. And let's do the same thing with price. We've got step one was to step three was 5 to 50 is 0.4. So a 40% change in price and a 20% change in quantity supplied. Step five. That's just where we're gonna plug it into our actual equation of quantity supply divided by price here. So we're gonna get 0.2 divided by 0.4, which is going to give us half here, right? 0.5 is our answer. We don't have to worry about signs, positive or negative. Doesn't matter. That is gonna be our answer. But now, how do we analyze this? Guess what? It's the same as before. This is going to be in elastic. Right? We've got a number less than one. It's gonna be any elastic. Our supply is any elastic at this point, The quantity supplied rose less in percentage than the price. Right? The price rose 40% here, but the quantity supplied only grew by 20%. It's in elastic. So we've got our same kind of summary down here, which is the same as we should remember where it's gonna be elastic. And in this case, I'm gonna put E with a small s that's elasticity of supply, right? Our price elasticity of supply is greater than one. That is gonna be elastic elasticity of supply less than one. That is going to be any elastic. Like we got in our problem and unit elastic, just like before elasticity of supply equals one. Cool, it's great how how similar all of these calculations have been. Right, All right, let's go ahead and do a little bit of practice related to price elasticity of supply.

2

Problem

The price elasticity of supply measures the responsiveness of:

A

Quantity supplied to changes in price

B

Quantity demanded to changes in supply

C

Quantity supplied to changes in income

D

Quantity supplied to changes in demand

3

Problem

If a one percent decrease in the price of a pound of pound cake causes a three percent decrease in the quantity of pound cake supplied:

A

Demand is inelastic

B

Demand is elastic

C

Supply is inelastic

D

Supply is elastic

4

Problem

If a decline in the price of flags $9 to $7, caused by a shift in the demand curve, decreases the quantity of flags supplied from 5,500 to 4,500, the:

A

Demand for flags is elastic

B

Supply of flags is elastic

C

Demand for flags is inelastic

D

Supply of flags is inelastic

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