Principles of Economics- Mankiw (5th) 103

Principles of Economics- Mankiw (5th) 103 - CHAPTER 5 E L A...

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CHAPTER 5 ELASTICITY AND ITS APPLICATION 107 and the supply curve is vertical. In this case, the quantity supplied is the same re- gardless of the price. As the elasticity rises, the supply curve gets flatter, which shows that the quantity supplied responds more to changes in the price. At the op- posite extreme, supply is perfectly elastic. This occurs as the price elasticity of sup- ply approaches infinity and the supply curve becomes horizontal, meaning that very small changes in the price lead to very large changes in the quantity supplied. In some markets, the elasticity of supply is not constant but varies over the supply curve. Figure 5-7 shows a typical case for an industry in which firms have factories with a limited capacity for production. For low levels of quantity sup- plied, the elasticity of supply is high, indicating that firms respond substantially to changes in the price. In this region, firms have capacity for production that is not being used, such as plants and equipment sitting idle for all or part of the day.
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