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lec 7

# lec 7 - Similarly we calculate the percentage change in...

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3.b. Elasticity of Supply The price of elasticity of supply measures how changes in price affect the quantity supplied. Supply is said to elastic when changes in price greatly affect the quantity supplied. Supply is said to be inelastic when changes in price do not greatly affect the quantity supplied. The price elasticity of supply depends on how easily sellers can change the amount of the good they produce. When it is difficult to change the amount produced supply tends to be elastic, when it is easy to change the amount produced supply tends to be inelastic. The price elasticity of supply is the percentage change in the quantity supplied divided by the percentage change in the price. That is Price elasticity of supply = Percentage change in quantity supplied Percentage change in price For example suppose that an increase in price from 6.00 to 6.30 raises the amount produced from 12000 to 13500. Percentage change in price = (6.30 - 6.00)/6.00*100 = 10 percent.

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Unformatted text preview: Similarly we calculate the percentage change in quantity supplied = (13,500 - 12,0000/12000*100 =15 percent. Price elasticity of supply = 15 percent = 1.5 10 percent 3.b.1 A percentage increase in price leads to a larger percentage increase in quantity supplied. Price Elastic Supply 6 Elasticity is greater than 1 5 Supply 4 3 2 1 200 300 400 500 Quantity 3.b.2 A percentage increase in price leads to a smaller percentage increase in quantity supplied. 3.b.3 Price Inelastic Supply Elasticity is less than 1 6 Supply 5 4 3 2 1 110 120 Quantity Price Perfectly Elastic Supply Elasticity equals infinity 6 5 4 Supply 3 Above \$3 the quantity supplied is infinite 2 At \$3 producers will supply any quantity Below \$3 the quantity supplied is zero 1 10 20 30 40 50 Quantity 3.b.4 A percentage increase in price leaves the quantity supplied unchanged. Price Perfectly Inelastic Supply Elasticity equals zero 6 Supply 5 4 3 2 1 10 20 30 40 50 Quantity...
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