Unit 1 MicroPrice Elasticity of

Supply

These are good connective phrases

by contrast…

A consequence of this might be

…

therefore…

this might

mean… on the other hand…this is because

Diagrams matter!

Diagram must havesFully labeledOriginal and new equilibriumDemand and supply the correct way round Well explained – you must explain why the

curve has shifted, in detailThink about the elasticity – e.g. oil has

inelastic demand and supply

Price elasticity of supply

The market for tractors is supplied by two firms, X and Y, each initially having 50 % of the market.A 10 % increase in the price of tractors leads to an increase in output from firm X of 10 % and from firm Y of 20 %. What is the price elasticity of supply of tractors in this market?

Price elasticity of supply

The market for tractors is supplied by two firms, X and Y, each initially having 50 % of the market.A 10 % increase in the price of tractors leads to an increase in output from firm X of 10 % and from firm Y of 20 %. What is the price elasticity of supply of tractors in this market?

Price change = 10%, total output change is 15%Therefore the price elasticity of supply = +1.5

Price elasticity of supply

Elasticity of supply

When demand for a good increases, equilibrium price stays the same. What is the elasticity of supply? Sketch this situation in the supply and demand diagram on the left (below)

Price

Quantity

Price

Quantity

D1 D2

When demand for a good increases, equilibrium price stays the same. What is the elasticity of supply? Sketch this situation in the supply and demand diagram on the left (below)

Price

Quantity

Price

Quantity

D1 D2

S1P1

When there is an increase in demand for a product, the rise in equilibrium price is large but the expansion in quantity produced is small. What is the elasticity of supply? Sketch the situation in the supply and demand diagram on the right (below)

Price

Quantity

Price

Quantity

D1 D2

S1P1

D1 D2

When there is an increase in demand for a product, the rise in equilibrium price is large but the expansion in quantity produced is small. What is the elasticity of supply? Sketch the situation in the supply and demand diagram on the right (below)

Price

Quantity

Price

Quantity

D1 D2

S1P1

D1 D2

S1

When there is an increase in demand for a product, the rise in equilibrium price is large but the expansion in quantity produced is small. What is the elasticity of supply? Sketch the situation in the supply and demand diagram on the right (below)

Price

Quantity

Price

Quantity

D1 D2

S1P1

D1 D2

S1

P1

Q1

When there is an increase in demand for a product, the rise in equilibrium price is large but the expansion in quantity produced is small. What is the elasticity of supply? Sketch the situation in the supply and demand diagram on the right (below)

Price

Quantity

Price

Quantity

D1 D2

S1P1

D1 D2

S1

P1

P2

Q1 Q2

Give three reasons why an industry’s supply curve might be price elastic in the short term

Spare capacity

High stock levels

Short production

times

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