Ch. 5 Sec. 4 - chapter 5 > Elasticity Section 4: The...

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>> Elasticity Section 4: The Price Elasticity of Supply chapter 5 The Tellez plan to drive up the price of oil would have been much less effective if a higher price had induced large increases in output by countries that were not party to the agreement. For example, if American oil producers had responded to the higher price by significantly increasing their production, they could have pushed the price of oil back down. But they didn’t—in fact, producers of oil who were not members of OPEC did not respond much to the higher price. This was another critical element in the success of the Tellez plan: a low responsiveness in output to a higher price of oil from other oil producers. To measure the response of producers to price changes, we need a measure parallel to the price elasticity of demand—the price elasticity of supply . Measuring the Price Elasticity of Supply The price elasticity of supply is defined the same way as the price elasticity of demand: (5-9) Price elasticity of supply = % change in quantity supplied % change in price The price elasticity of supply is a measure of the responsiveness of the quantity of a good supplied to the price of that good. It is the ratio of the percent change in the quantity supplied to the percent change in the price as we move along the supply curve.
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The only difference is that this time we consider movements along the supply curve rather than movements along the demand curve. Suppose that the price of tomatoes rises by 10%. If the quantity of tomatoes sup- plied also increases by 10% in response, the price elasticity of supply of tomatoes is 1 (10%/10%), and supply is unit-elastic. If the quantity supplied increases by 5 percent, the price elasticity of supply is 0.5 and supply is inelastic; if the quantity increases by 20%, the price elasticity of supply is 2 and supply is elastic. As in the case of demand, the extreme values of the price elasticity of supply have a simple graphical representation. Panel (a) of Figure 5-6 shows the supply of cell phone frequencies, the portion of
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This note was uploaded on 04/13/2010 for the course ECON 1110 taught by Professor Wissink during the Fall '06 term at Cornell University (Engineering School).

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Ch. 5 Sec. 4 - chapter 5 > Elasticity Section 4: The...

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