Price Elasticity of Supply

# Price Elasticity of Supply - Price elasticity of supply =...

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ELASTICITY AND ITS APPLICATION 1 Price Elasticity of Supply Price elasticity of supply measures how much Q s responds to a change in P . Price elasticity of supply = Percentage change in Q s Percentage change in P Loosely speaking, it measures sellers’ price-sensitivity. Again, use the midpoint method to compute the percentage changes.

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ELASTICITY AND ITS APPLICATION 2 Q 2 Price Elasticity of Supply Price elasticity of supply equals P Q S P 2 Q 1 P 1 P rises by 8% Q rises by 16% 16% 8% = 2.0 Price elasticity of supply = Percentage change in Q s Percentage change in P Example:
ELASTICITY AND ITS APPLICATION 3 The Variety of Supply Curves The slope of the supply curve is closely related to price elasticity of supply. Rule of thumb: The flatter the curve, the bigger the elasticity. The steeper the curve, the smaller the elasticity. Five different classifications.…

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ELASTICITY AND ITS APPLICATION 4 S “Perfectly inelastic”  (one extreme) P Q Q 1 P 1 P 2 Q changes by 0% 0% 10% = 0 Price elasticity of supply = % change in Q % change in P = P rises by 10% Sellers’ price sensitivity: S curve: Elasticity: vertical none 0
ELASTICITY AND ITS APPLICATION 5 S “Inelastic” P Q Q 1 P 1 Q 2 P 2 Q rises less than 10% < 10% 10% < 1 Price elasticity of supply = % change in Q % change in P = P rises by 10% Sellers’ price sensitivity: S curve: Elasticity: relatively steep relatively low < 1

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ELASTICITY AND ITS APPLICATION 6 S “Unit elastic” P Q Q 1 P 1 Q 2 P 2 Q rises by 10% 10% 10% = 1 Price elasticity of supply = % change in Q % change in P = P rises by 10% Sellers’ price sensitivity: S curve: Elasticity: intermediate slope intermediate = 1
ELASTICITY AND ITS APPLICATION 7 S “Elastic” P Q Q 1 P

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Price Elasticity of Supply - Price elasticity of supply =...

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