Unit 2 · Topic 2.4

Price Elasticity of Supply

The price elasticity of supply is the percent change in quantity supplied divided by the percent change in price.

Practice 3: Manipulation

Part 1 · Hook

Why this matters

When a song goes viral, a print shop can turn out a thousand posters of the band by Friday, but a concert hall cannot add a single seat for Saturday. The same jump in price brings a flood of posters and no extra seats. How strongly sellers respond to a price is the price elasticity of supply.

Part 2 · Before you start

What this builds on

Part 3 · Prerequisite check

Quick check before you start

1. By the law of supply, a higher price

  1. raises the quantity supplied
  2. lowers the quantity supplied
  3. shifts supply left
  4. leaves the quantity supplied the same
Show the answer

Price and quantity supplied move together.

  • Correct: raises the quantity supplied:
  • lowers the quantity supplied:
  • shifts supply left:
  • leaves the quantity supplied the same:

2. The price elasticity of demand is

  1. the percent change in quantity demanded over the percent change in price
  2. the change in price over the change in quantity
  3. price times quantity
  4. the slope of the demand curve
Show the answer

Percent changes, quantity on top.

  • Correct: the percent change in quantity demanded over the percent change in price:
  • the change in price over the change in quantity:
  • price times quantity:
  • the slope of the demand curve:

Part 4 · See it

See it first

Three supply curves through $4 and 40 units: a vertical one is perfectly inelastic, a steep one is inelastic, and a flat one is elastic, so the same price rise adds no units, a few units or many units.
Three supply curves through $4 and 40 units: the same price rise adds no units, a few, or many. Invented data for practice. LevlPrep original diagram.

Part 5 · Step by step

How it works, step by step

  1. Sellers have spare machines, inputs that are easy to buy, or time to expandthey can add output quickly
  2. They can add output quicklya price rise brings a large percent rise in quantity supplied: supply is elastic
  3. Supply is elastica rise in demand raises quantity a lot and the price only a little

Part 6 · Key ideas

Key ideas

  • Price elasticity of supply = percent change in quantity supplied divided by percent change in price. It is positive.
  • Same benchmarks as demand: greater than 1 elastic, less than 1 inelastic, 1 unit elastic; vertical supply is perfectly inelastic, horizontal supply perfectly elastic.
  • Supply is more elastic with spare capacity, inputs that are easy to buy, goods that can be stored, and more time to adjust.
  • Perishable goods and fixed capacity (seats, land) make supply inelastic.

Part 7 · Misconception

A common mistake

The wrong idea: Supply elasticity depends on how many substitutes buyers have.

What actually happens: Substitutes drive demand elasticity. Supply elasticity is about sellers: how easily they can add output when the price rises, through spare capacity, available inputs, storage and time.

Part 8 · Check yourself

Check yourself

Exam-style questions. Anything you miss goes into your review queue.

Data

Two sellers respond to a higher price

Weekly quantity supplied before and after the price rises from $20 to $25 (invented data for practice)
SellerGoodQuantity at $20Quantity at $25
Wren StudioHand-knit scarves100105
Copperleaf PrintPrinted posters100150

1. Calculate the price elasticity of supply of Copperleaf's posters when the price rises from $20 to $25.

Type a number. A four-function calculator is allowed, as on the exam.

Show the answer

Percent change in quantity supplied: 150−100100×100\frac{150 - 100}{100} \times 100=50%= 50\%. Percent change in price: 25−2020×100=25%\frac{25 - 20}{20} \times 100 = 25\%. Elasticity: 50÷25=250 \div 25 = 2, elastic.

  • Answer: 2

2. Calculate the price elasticity of supply of Wren Studio's scarves for the same price rise.

Type a number. A four-function calculator is allowed, as on the exam.

Show the answer

Quantity: 105−100100×100\frac{105 - 100}{100} \times 100=5%= 5\%. Price: 25%25\%. Elasticity: 5÷25=0.25 \div 25 = 0.2, inelastic.

  • Answer: 0.2

Scenario

The Bellweather Amphitheater on a summer night

The Bellweather Amphitheater, an invented outdoor venue, has exactly 8,000 seats and no standing room. For a Saturday concert, tickets sold for $50 last year. This year the band is more popular, and the venue can sell all 8,000 tickets at $90.

A developer plans to build a second, larger venue across the river, which will take about three years.

3. How would you describe the supply of seats for a Saturday concert at the amphitheater?

  1. Perfectly elastic: a horizontal supply curve
  2. Elastic, because the price rose so much
  3. Unit elastic, because the venue sells out
  4. Perfectly inelastic: a vertical supply curve
Show the answer

The number of seats is fixed at 8,000 whatever the price, so supply is perfectly inelastic: a vertical supply curve with elasticity 0.

  • Perfectly elastic: a horizontal supply curve: A horizontal curve would add seats at the same price without limit.
  • Elastic, because the price rose so much: A large price change with no quantity change marks inelastic supply.
  • Unit elastic, because the venue sells out: Unit elastic means quantity rises by the same percent as price.
  • Correct: Perfectly inelastic: a vertical supply curve: Right: the quantity is 8,000 at each price.

4. The price elasticity of supply of a good is 1.5. What does this mean?

  1. Elastic: a 10% price rise brings a 15% rise
  2. Inelastic: a 10% price rise brings a 1.5% rise
  3. Supply is unit elastic
  4. A 10% price rise lowers quantity supplied by 15%
Show the answer

1.5 is greater than 1: supply is elastic. A 10% rise in price raises the quantity supplied by 15%.

  • Correct: Elastic: a 10% price rise brings a 15% rise: Right: 1.5 times 10%.
  • Inelastic: a 10% price rise brings a 1.5% rise: An elasticity above 1 is elastic, and 1.5 times 10% is 15%.
  • Supply is unit elastic: Unit elastic is exactly 1.
  • A 10% price rise lowers quantity supplied by 15%: Quantity supplied rises with price.

5. Supply of a toy is elastic. Demand for the toy rises. Compared with a toy whose supply is inelastic, what happens?

  1. The price rises more, quantity less
  2. Neither price nor quantity changes
  3. Quantity rises more, the price less
  4. The price falls because supply is elastic
Show the answer

With elastic supply, sellers respond to the higher demand mostly by producing more, so quantity rises a lot and the price rises a little. With inelastic supply, the price rises more and the quantity less.

  • The price rises more, quantity less: That happens when supply is inelastic.
  • Neither price nor quantity changes: A rise in demand changes both unless a curve is flat or vertical.
  • Correct: Quantity rises more, the price less: Right: elastic supply absorbs the demand increase with more output.
  • The price falls because supply is elastic: Higher demand raises the price; elastic supply only limits how much.

Part 9 · Summary

Summary

The price elasticity of supply is the percent change in quantity supplied divided by the percent change in price. Above 1 supply is elastic, below 1 inelastic; a vertical supply curve is perfectly inelastic and a horizontal one perfectly elastic. Supply is more elastic when sellers have spare capacity, easy access to inputs, goods they can store and more time to adjust. The more elastic supply is, the more a rise in demand shows up as more output rather than a higher price.

Part 10 · Up next

What comes next

Part 11 · Connections

Connections

Question set for this topic