elasticity+of+supply

=Elasticity of Supply=

The measure of the response of production/supply to a change in price. The higher the price of a product, the higher the production rates will rise. This occurs because the demand for those prices has increased. Price elasticity of supply is measured by dividing the percent change in supply in response to the percent change in price. In equation form, the Price Elasticity of Supply(PEoS) is:

//[% change in quantity supplied] / [% change in price]//

The higher the elasticity, the more sensitive suppliers are to price changes. The higher the elasticity when prices increase sellers supply less and when price goes down sellers supply more.

As a reference, elasticity of supply can be interpreted by:

PEoS > 1 Supply is Elastic (Sensitive to price changes) PEoS = 1 Supply is Unitary Elastic PEoS < 1 Supply is Price Inelastic (Insensitive to price changes)

Example: Calculating Elasticity of Supply
Old Price: $100 New Price: $110 Old Quantity Supplied: 20,000 New Quantity Supplied: 25,000

[New - Old] / Old
 * Change in Quantity Supplied/Price**

[$110 - $100] / $100 = 10%
 * Change in Price**

[25,000 - 20,000] / 20,000 = 25%
 * Change in Quantity**

[% change in quantity supplied] / [% change in price] PEoS = .25 / .10 PEoS = 2.5
 * Price Elasticity of Supply**

This example explores a price change of $10 with a corresponding increase in quantity supplied of 5,000 units. This information is used to calculate a single value, elasticity of supply, to relate the percent change of quantity supplied to the percent change in price. In this particular example, the result is a elasticity of supply equaling 2.5.

=Questions=

1. Suppose the price of potatoes fell from $50 a crate to $30. A typical potato farmer would have supplied 135 crates a day at $50, but at $30 a crate would supply 65 crates a day. the supply of potatoes is (a) Inelastic (b) Increasing (c) Elastic (d) Decreasing (e) Unit elastic

2. Everything else remaining the same, production possibilites _ the price elasticity of supply of potatoes, and storage possibilites _ the price elasticity of supply of potatoes. (a) Decrease; increase (b) Increase; increase (c) Increase; decrease (d) Do not change; do not change (e) Decrease; decrease

3. Each of two firms willingly supply 25,000 gadgets a month at a price of $13. If the price were to fall to $11, one of the firms would decrease its monthly production by 1,500 and the other would decrease its monthly production by 2,500. If these are the only two producers, the elasticity of supply in this market is: (a) 0.25 (b) 0.5 (c) 1 (d) 2

4. A product is found to have a price elasticity of supply of + 2.0 If its price falls from £2.00 to £1.50, its supply will (a) Decrease by 50% (b) Increase by 50% (c) Decrease by 25% (d) Increase by 10%

5. Which of the supply curves illustrated below (A, B, C or D) has an price elasticity of supply greater than +1?

(a) A (b) B (c) C (d) D

=**Answers**=

//#1 Answer: C. Elastic [(65-135)/135] / [(30-50)/50)] = 1.3 Which is elastic since it's above 1.

Production capacity probably decreases elasticity - you have to sell to cover your increased fixed costs. Storage capacity definitely increases elasticity - you do not have to sell if price is too low.
 * 1) 2 Answer: A. Decrease, increase

Using the midpoint formula for calculating the percentage changes, the elasticity of supply is (50,000 - 46,000) / 48,000 / (13 - 11) / 12 = ½ or 0.5.
 * 1) 3 Answer: B. 0.5

//Rearranging the equation for PEoS to solve for change in supply:// PEoS = [% change in quantity supplied] / [% change in price] [% change in quantity supplied] = PEoS * [% change in price]
 * 1) 4 Answer: A// //Decrease by 50%//

//Substituting what we know(PEoS equals -2.0 and percent change in price is 25%):// [% change in quantity supplied] = -2.0 * 25% [% change in quantity supplied] = -50%

//As such, the supply will decrease by 50%.//

//#5 Answer: A// //Looking at the slope of the lines we see that the slope represents the change in price over the change in quantity supplied and therefore the inverse of the slope is PEoS. Using this information, it is plain to see that only the supply curve represented by A has a slope whose inverse is greater than one and therefore a PEoS greater than one.//

= = =Reference=

FunQA.com http://www.funqa.com/economics/3927-Economics.html McConnel I Brue Microeconomics Online Learning Center http://highered.mcgraw-hill.com/sites/0072875615/student_view0/chapter7/quiz_one.html Tutor2U http://www.tutor2u.net/quiz/economics/jbc_econ_supplyelasticity_1.htm