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Introduction to price elasticity of supply

AP Micro: MKT‑3 (EU), MKT‑3.E (LO), MKT‑3.E.6 (EK), MKT‑3.E.7 (EK)

Video transcript

- [Instructor] We've done many videos on the price elasticity of demand, now we're going to focus on the price elasticity of supply. And it's a very similar idea, it's just being applied to supply now, it's a measure of how sensitive our quantity supplied is to percent changes in price. And we will calculate it as our percent change in quantity supplied for a given, for a given percent change in price, percent change in price. Now, to make this a little bit more tangible, let's look at a simple market, let's say this is the market for apples, right over here, where our vertical axis is price, and this could be thousands of dollars per ton, and then our horizontal axis is quantities, and maybe this is in tons per day. And this supply schedule and this supply curve are essentially describing the same data. So, let's think about our price elasticity of supply as we go from point A, point A, to point B. Well, on the supply schedule, point A is this point right over here, our price is four, our quantity is one. And point B is right over here. So let us calculate from point A to point B our price elasticity of supply. So, first of all, what is going to be our percent change in price? Well, we're going from four to six, so it's an increase of two, so our percent change in price is going to be equal to two, is how much we increased from a base of four, times 100% and that of course is going to be equal to a 50% increase in price. And then what is going to be our percent change in quantity? Well, we're going from one to two, so we're starting at a base of one. We are increasing by one, and then multiply that times 100%, that gives us 100%. So, when we have a 50% increase in price, that resulted going from point A to point B, in a 100% increase in quantity supplied. So, 100% divided by 50%, that is going to give us, this is going to be equal to two. Now, what if we go from point B to point C? So, this is point C right over here. I encourage you, pause this video and see if you can calculate the price elasticity of supply when going from point B to point C. Well, we're going to do a similar calculation. Our percent change in price. We start at a base of six and we are increasing by two. So we're gonna multiply that times 100%. So that is approximately, this is 1/3 times 100%, so approximately 33.3%. And then what is our percent change in quantity supplied? Well, we are going to go from two to three. So we start at a base of two, we increase by one. So plus one, and multiply times 100%. And so that's going to be given, it's going to be equal to 50%. And so when we have a 1/3 increase, or 33.3% increase in our price, we have a 50% increase of our quantity supplied, when we go from point B to point C right over here, and then one way to think about it is 50% divided by 1/3 is the same thing as 50% times three, and so this is going to be equal to, this is going to be equal to 1.5. So, just as we saw when we calculated price elasticity of demand, either when you have a linear curve here, your price elasticity of supply can change. It is not the same thing as slope. Now another thing to keep in mind is the way that I calculated price elasticity of supply in this video, which is arguably the simplest way, you would not get the same value when you're calculating the magnitude going from A to B than if you went from B to A. There are slightly more advanced techniques, the mid-point technique, for example, that will give you the same answer regardless of which direction you go in, but that's beyond the scope of this first video. Now, just as we discussed in the demand case, there are cases that you would consider to be more inelastic supply and cases where you would consider to be more elastic supply. So, one way to think about it is, if the magnitude of your price elasticity of supply is less than one, and of course this is magnitude so it's going to be greater than or equal to zero, well, then you're talking about inelastic price elasticity of supply, inelastic. That's a situation in which our quantity supplied is not going to change so much depending on, is not going to be so sensitive to our change in price. Now, if our price elasticity of supply is greater than one, that's generally considered to be elastic, for a given percent change in price, you're getting a larger than that percent change in quantity supplied.