Elasticity of Supply Thinking about elasticity of supply
Elasticity of Supply
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- We've been talking a lot about elasticities of a demand,
- so you were probably wondering,
- can we think about elasticities of a supply?
- And as you can imagine, the answer is:
- of course we can!
- And it's interesting to think about
- how does the quantity the percent change in quantity supplied
- relate to percent change in prices
- So, for example, let's say we have
- a lemonade stand of some sort.
- So this is price on that axis
- and that is quantity on that axis.
- And let's say that our supply curve
- looks something like that
- Obviously, the higher the price,
- the more quantity we are willing to supply.
- And let's say at a price of $1,
- the quantity supplied is going to be 10 gallons/week.
- this is going to be 10 gallons/week.
- So the quantity of supplies is going to be 10 gallons per week.
- And let's say that if the price goes to $2,
- the quantity supplied goes to 16 gallons per week.
- So what is the elasticity of supply,
- roughly, over this period right over here?
- So the elasticity... elasticity of supply, and you can imagine
- how we can calcalute this as % change in quantity supplied over our
- % change in price, so what is our percent
- change in price, well we went from $1 to $2, (so this part right over here) is going to be
- we went up by $1,
- so we went up by $1 per gallon,
- so it's going up by $1,and we all use our starting point as base we can do in traditionally finding of percent change
- because we have the same percent change , if we're going from 1 to 2, as from 2 to 1
- so instead the conventionally we think about elasticity is to use the mid-point of these two, use the average of these two
- so 1+2 is 3, 3/2 is 1,5. So it's 1 over $1.50. We can say, $1,50 is right in between these two things.
- and 1 over $1,50 this is about 67 % roughly, so this is approximatelly 67%
- change in price based on how we just calculate it, how we're using
- the midpoint as our base, and that are % change
- in quantity supplied, that's % change in quantity supplied, that's this, this right over here
- we went from 10 to 16, so we have +6 over base of midpoint between 10 and 16, is 13. 10 + 16 is 26, divided by two
- is 13. 6 over 13. Which is going to be something percent. We'll take calculator out, so
- we have 6 divided by 13, get this 46 %. So this is, this right over here is 46%. So we have
- when we had based on the way we have calculated, this 67%
- increase in price we had 46% increase in quantity supplied.
- So this is 46% increase in quantity supplied, it's all we can see about elasticity
- of supply, it's goíng to be 46% over 67%, so it's going to be something less than 1.
- We can get, so that's going to be that divided by 0,6666666... keeps going on forever, this is 0,69
- So this is elasticity of supply 0,69, we've back see it approximatelly 0,69.
- we've tell this, we get a smaller percent at least this price point right over here, we get a smaller percent change in quantity
- supplied than our percent change in price. Let's think about like me did with let me talk about we do about elasticities of demand, let's think about different scenarios
- So let's think about, let's think about a scenario that is inelastic.
- That is maybe perfectly inealastic. So let's say that price,
- price and quantity. So let's take me for an example - I make videos, I love making videos, this is what I want spend my days doing
- and I don't care about how much they pay me, or how little you pay me, I guess prepair to be enough
- that would maybe and I spent little bit more time making videos.
- What else just as soon that I don't completely, I you know what you pay me a penny pro video or 0 pro video or do you pay me a $1000 pro video
- I'm going to just make the same number videos every day. So this is the right over here videos, videos pro day on average and it's
- and this is the price per video. And let's say no matter how much you pay - what do you pay me nothing or you pay me $1000.
- I was going to produce on average, let's say 3 videos a day. So than you have this
- right over here you have an perfectly inelastic
- perfectly inelastic supply curve. Now you can have the other scenario, you can have the
- when you are farmer, so let me do price and quantity. Now you can have the other scenario when you are farmer
- and you can either do crop, aid cropy, maybe it's corn and wheat. And you can easily swap between the two
- unless this is soon for simplicity cost you the exact the same to produce one or the other. So
- in that situation so let's say that the price of wheat pearl, let's say we're using capable price units. So the price of wheat is for you know
- adjusting 4 units in all of that, let's say is $10 I don't know for bushels or something like that. I like this simplyfy for the sink model right here but this
- right over here we're thinking about corn. We're thinking about corn.
- We're thinking about corn, and so if corn so let's say corn is right $10. We're bought it for right $10 I will produce, so them let me make this clear
- So price of corn is $10 and the quantity of corn maybe I don't know produce, I produce 2000 bushels
- I know these prices are away for what a real price for bushel of corn or wheat is the same thing
- my quantity for wheat right here is 2000. Now
- if the price of corn will go marginally up if the price of corn, so let me put this, so this is graph of corn. So this is $10
- and this is 2000 bushels pro year of something, so let's say that we're right over there,
- now if the price for corn goes marginally up, the price for corn goes up to even $10,5 per bushel
- all cents awnished from wheat production to corn production, this is going to be zero and this is going to go to 4000
- So then, whenever we go, just as 10, line, whenever we go all the way to 4000. And likewise if this price will go down
- if this go down like 9,95, I will shift all my production to wheat and wouldn't produce any corn. And so there you see that we have the very
- the main curve is getting very flat and you can see based on very very small percent changes in prices, I have very large percent changes in quantity supplied.
- So this right over here is approaching, this is approaching, approaching perfect elasticity,
- huge changes in quantity supplied elasticity for small percent changes in price
- Now, the cool thing about elasticity of supply is actually much easier to make a curve that has unit elasticity or even
- it's easy if you have unit elasticity, but if you have unit elasticity the easy as curve I can draw
- for unit elasticity is going look like this, much this is curve for unit elasticity, it will be curve looks like that
- and the reason why it works in this case is upwards sloping as price increases so as quantity
- increase for the supply curve so that any point here the 2 are going to be proportional
- So a given change in quantity and a given change in price they are going to represent the same percentages.
- Because as price is increasing, what this is we have large price, or we have medium price, you have medium quantity
- When you have a large price, you have large quantity.
- So these steps are going to be the same percentage of I wonder you have small prices, you have small quantity.
- It's much easier to construct a curve, a supply curve that has unit elasticity, than this is to construct a normal demand curve that has unit elasticity.
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