Price elasticity of supply Ep is a measure of how much quantity supplied of a

# Price elasticity of supply ep is a measure of how

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Price elasticity of supply (Ep) is a measure of how much quantity supplied of a good responds to a change in the price of that good. Depends on the flexibility of sellers to change the amount of the good they produce 5
Supply Ep = Percentage change in quantity supplied / Percentage change in price Supply often becomes less elastic as quantity rises, due to capacity limits. Supply is elastic if quantity supplied responds substantially to changes in the price. In this case Supply Ep > 1 Supply is inelastic if quantity supplied responds only slightly to changes in the price. In this case Supply Ep < 1. Supply has unit elasticity if the quantity moves the same amount proportionately as the price. In this case Supply Ep = 1 A vertical supply curve is perfectly inelastic (Elasticity =0). A horizontal supply curve is perfectly elastic (Elasticity =Infinity). 6
The more easily sellers can change the quantity they produce, the greater the price elasticity of supply. For many goods, price elasticity of supply is greater in the long run than in the short run, because firms can build new factories, or new firms may be able to enter the market. Applications of Supply, Demand and Elasticity 1) Can good news for farming be bad news for farmers?New hybrid of wheat – increase production per acre 20%
2) Why did OPEC fail to keep the price of oil high? 1970s: OPEC reduced supply of oil Increase in prices 1973-1974 and 1979-1981 Short-run: supply is inelastic Decrease in supply: large increase in price 1982-1990 – price of oil decreased Long-run: supply is elastic Decrease in supply: small increase in price 8

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