Recall: 3.1: We looked at how the price elasticity of demand measures the responsiveness of...
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Transcript of Recall: 3.1: We looked at how the price elasticity of demand measures the responsiveness of...
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Recall: 3.1: We looked at how the price elasticity of
demand measures the responsiveness of consumers to a change in a product’s price
Now: 3.2: Price elasticity of supply measures the
responsiveness of producers (and the quantities they supply) to changes in the product’s own price.
3.2 Price Elasticity of Supply
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Elastic Supply Supply for which a percentage change in a product’s
price causes a larger percentage change in quantity supplied
Inelastic Supply Supply for which a percentage change in a product’s
price causes a smaller percentage change in quantity supplied
Elastic & Inelastic Supply
Small increase in price leads
to huge increase in
quantity produced.
Large increase in price leads
to small increase in
quantity produced.
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*Main* Factor is passage of time. The Immediate Run (e.g. 1 month)
Production period during which none of the resources required to make a product can be varied – supply is perfectly inelastic
The Short Run (e.g. less than 1 growing season for fruit) Production period during which at least one of the
resources required to make a product cannot be varied – elastic or inelastic
The Long Run (e.g. over a decade) Production period during which all resources required to
make a product can be varied and businesses can either enter or leave the industry– supply is perfectly inelastic
Factors That Affect Price Elasticity of Supply
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Constant Cost Industry An industry that is not a major user of any single
resource Perfectly Elastic Supply
Supply for which a product’s price remains constant, regardless of quantity supplied
Increasing Cost Industry An industry that is a major user of at least one resource
Definitions
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We’ve seen constant cost industries and increasing cost industries – what about decreasing cost industries? Can the amount of resources used to make something decrease over time?Yes! Moore’s Law and the example of Microchips is Moorea perfect example of this.
Moore’s Law states that the processing power of computer chips doubles every 12 months, and it’s been right since 1960, reducing the real price of processing power since the 1960s by 99.9999%.
Decreasing Cost Industry?
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Calculating the Price Elasticity of SupplyCase Study: When the price of tomatoes rises from $2 to $3 a
kilogram, the quantity supplied by farmers increases from 100,000 to 200,000 kg. What is the value of the price elasticity of supply for this industry?
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Finding that es = 1.67, this means that a certain percentage change in price causes a percentage change in quantity supplied that is 1.67 times as large.
Calculating the Price Elasticity of Supply