as economics price elasticity of supply
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AS EconomicsPrice Elasticity of Supply
Today’s objectives
• Understand price elasticity of supply• Be able to use
price elasticity of supply
Price elasticity of supply
• What do you think it is ?• How do you
calculate it?• Write an
example (with numbers)
Price elasticity of supply
• What do entrepreneurs want to do when prices increase?
• Why?
Price Elasticity of Supply
• When price of Muppets characters increases by 20% there is a 10% increase in supply
% change in quantity supplied% change in price
10%20%
=0.5
=
Price elasticity of supply
• The answer shows the extent to which supply is elastic
• Answers below 1 are said to be inelastic
• Answers above 1 are said to be more price elastic
When demand for a good increases, equilibrium price stays the same. What is the elasticity of supply? Sketch this situation in the supply and demand diagram on the left (below)
Price
Quantity
Price
Quantity
D1 D2
When demand for a good increases, equilibrium price stays the same. What is the elasticity of supply? Sketch this situation in the supply and demand diagram on the left (below)
Price
Quantity
Price
Quantity
D1 D2
S1P1
When there is an increase in demand for a product, the rise in equilibrium price is large but the expansion in quantity produced is small. What is the elasticity of supply? Sketch the situation in the supply and demand diagram on the right (below)
Price
Quantity
Price
Quantity
D1 D2
S1P1
D1 D2
When there is an increase in demand for a product, the rise in equilibrium price is large but the expansion in quantity produced is small. What is the elasticity of supply? Sketch the situation in the supply and demand diagram on the right (below)
Price
Quantity
Price
Quantity
D1 D2
S1P1
D1 D2
S1
When there is an increase in demand for a product, the rise in equilibrium price is large but the expansion in quantity produced is small. What is the elasticity of supply? Sketch the situation in the supply and demand diagram on the right (below)
Price
Quantity
Price
Quantity
D1 D2
S1P1
D1 D2
S1
P1
Q1
When there is an increase in demand for a product, the rise in equilibrium price is large but the expansion in quantity produced is small. What is the elasticity of supply? Sketch the situation in the supply and demand diagram on the right (below)
Price
Quantity
Price
Quantity
D1 D2
S1P1
D1 D2
S1
P1
P2
Q1 Q2
Price elasticity of supply
• Price elasticity of supply is often used to explain why prices rise or fall quite dramatically when there are changes in demand
• For example draw a supply curve in July for:
Price elasticity of supply
• What about for:
• If there is no spare stock and all oil wells are producing at full capacity?
Price elasticity of supply
• On the other hand what about for:
• If there is spare stock and factories have spare capacity?
What might affect a industry’s price elasticity of supply?
Spare capacity Stock levels
Supply of raw
materials
Ease of switching between
production of different
goods
Number of firms in the
market
Short production
times
What examples can you think of for perfectly inelastic supply curves?
Price
Quantity
Price elasticity of supply
• Price elasticity of supply is often used to explain why prices rise or fall quite dramatically when there are changes in demand
• For example draw and explain a supply curve in July for:
Now draw a supply curve for next JulyWhat is the difference? Why?
Price elasticity of supply
• Price elasticity of supply is often used to explain why prices rise or fall quite dramatically when there are changes in demand
• For example draw a supply curve in for:
You have just moved to the desert. Draw a new supply curve for water.What is the difference? Why?
Today’s objectives
• Understand price elasticity of supply• Be able to use
price elasticity of supply