⏱️ November 15, 2020
The price elasticity of supply is the measurement of how responsive firms (businesses) are to a change in the price of a good or service in the market. It shows us just how much they will alter their production when the price of a product changes.
💡You must drop all negatives when calculating the elasticity of supply.
Types of Elasticity
Just like with demand, there are 3 types of elasticity for supply: elastic, inelastic, and unit elastic:
Time is the biggest factor in determining the price elasticity of supply. Producers need time to adjust production or retrieve the resources needed for production. Most goods have an inelastic supply in the short-run (where at least one resource is fixed) and have an elastic supply in the long-run. Sometimes, you will have a perfectly inelastic supply which means that the quantity of goods is set and cannot be changed (i.e. there are a set number of hotel rooms in a hotel 🏨).
Resources are typically fixed in the short run because producers are not able to acquire new resources or change the number of resources they have that quickly. Let's consider this scenario, a farmer has 10 acres on which he grows oranges and learns that he can get a higher price for oranges at the market. His first reaction is to produce more oranges however he is limited to the 10 acres of land. This is an example of being in the short run. As more time passes he may be able to acquire additional acreage of land, and be operating in the long run.🍊
Calculating the Price Elasticity of Supply
Remember to drop the negatives when solving for elasticity of supply!
The elasticity coefficient you just calculated can be applied to determine the type of supply for that good or service.
💸 Unit 1: Basic Economic Concepts
1.0Unit 1: Basic Economic Concepts
1.1Basic Economic Concepts: Scarcity
1.2Resource Allocation and Economic Systems
1.3Production Possibilities Curve (PPC)
📈 Unit 2: Supply and Demand
2.4Price Elasticity of Supply
2.6Market Equilibrium and Consumer and Producer Surplus
2.7Market Disequilibrium and Changes in Equilibrium
2.8The Effects of Government Intervention in Markets
⚙️ Unit 3: Production, Cost, and the Perfect Competition Model
3.6Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market
📊 Unit 4: Imperfect Competition
4.1Introduction to Imperfectly Competitive Markets
💰 Unit 5: Factor Markets
5.2Changes in Factor Demand and Factor Supply
5.3Profit-Maximizing Behavior in Perfectly Competitive Factor Markets
🏛 Unit 6: Market Failure and Role of Government
6.1Socially Efficient and Inefficient Market Outcomes
6.3Public and Private Goods
6.4The Effects of Government Intervention in Different Market Structures
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