Notice, however, that here the directed line segments all go in the
same
direction, so
that (as we would expect)
s
is positive.
In Figure M.6-1 (a), notice that all three ratios are < 1: supply is
inelastic.
In Figure
M.6-1 (b), all three ratios are > 1: supply is
price-elastic.
And in (c), both
A
and
E
coin-
cide with the origin: all of the ratios are equal to 1, and the supply curve has
unitary
price elasticity at
C
.
Application 2: Supply Elasticity: The “Eyeballing” Method
If an
exact
numerical value for price elasticity of supply is not required, then Figure M.6-
2 provides a simple method for gauging whether supply is elastic, inelastic, or of uni-
tary elasticity. If the tangent to the supply curve at a point
C
intersects the
vertical
axis
in the positive quadrant, then supply is
elastic
at
C.
If it intersects the
horizontal
axis in
the positive quadrant, then supply is
inelastic
at
C.
And if the tangent at
C
passes
through the
origin
, then (
regardless of its slope
) the supply curve at
C
has
unitary
price
elasticity.
Application 3: Price, Elasticity, and Marginal Revenue
In the text (p. 363), we derive the following relation between price (
P
), price-elasticity
(
) and marginal revenue (MR):
MR =
P
(1 + 1/
), or equivalently,
P
= MR [
/(
+ 1)].
(M.6.4)
We can use Figure M.6-3 to illustrate one implication of Equation M.6.4. With one
exception, if we know
any two
of the 4 variables
P
, MR,
and the vertical intercept
A
,
we can calculate the
other
two. To see why, note that
=
OF/AF
and
P
=
OF
, so that MR
=
OF
(1 +
AF/OF
) =
OF
+
AF = OF – FA.
What this says is that
A
–
P = P –
MR, or MR =
2
P – A
, or
P =
(
A
+ MR)/2, or (in other words) that
P
is
midway
between MR and the
MATH MODULE 6: ELASTICITIES
M6-3
•
•
•
P
O
Q
C
3
C
2
C
1
ε
S
> 1
ε
S
= 1
ε
S
< 1
FIGURE M.6-2