Elasticity of Supply

Elasticity of Supply

• The supply of goods that can be easily increased with little difficulty is elastic (e.g., CDs, books, pizza).
• The supply of goods that cannot be easily increased due to significant difficulties is inelastic (e.g., automobiles, apples).

Inelastic Supply

• Inelastic supply occurs when the quantity supplied changes very little in response to a change in price.
• Examples of inelastic supply include:
  • Automobiles: increasing production requires building a new factory, hiring hundreds of workers, etc.
  • Apples: increasing production requires planting more trees, which takes years to grow and produce.

Factors Affecting Supply

• There are three factors unrelated to price that affect supply:
  • Change in production costs (e.g., decrease in production costs leads to an increase in supply).
  • Change in resource prices (e.g., increase in labor costs leads to a decrease in supply).
  • Maximization of profit (e.g., producers may increase supply to maximize profit).

Determinants of Supply

• Determinants of supply include:
  • Production costs
  • Resource prices
  • Technology
  • Number of sellers
  • Expectations

Market Equilibrium

• Market equilibrium occurs when the quantity demanded equals the quantity supplied.
• The equilibrium price and quantity can be determined by finding the point where the demand and supply curves intersect.

Practice Question

• When market conditions change, the demand or supply curve shifts.
• This can result in a surplus or shortage in the market.
• The direction of the shift depends on the factor causing the change.

Price Elasticity of Demand

• Price elasticity of demand measures the responsiveness of the quantity demanded to a change in price.
• Determinants of price elasticity of demand include:
  • Availability of close substitutes
  • Necessities versus luxuries
  • Definition of the market (e.g., food vs. ice cream)

Determinants of Demand

• Determinants of demand include:
  • Price of related goods
  • Number of buyers
  • Complements
  • Substitutes
  • Income

Factors Affecting Demand

• There are four factors unrelated to price that affect demand:
  • Change in income
  • Change in prices of related goods
  • Change in consumer preferences
  • Change in population or demographics

Demand and Supply

• The demand curve shows how the quantity demanded changes in response to a change in the price.

Determinants of Demand

• There are 4 factors unrelated to price that affect demand:
  • Price of related goods
  • Number of buyers
  • Complements and substitutes
  • Expectations

Supply Curve

• The supply curve shows how the quantity supplied changes in response to a change in the price.

Determinants of Supply

• There are 3 factors unrelated to price that affect supply:
  • Production costs
  • Technology
  • Expectations

Market Equilibrium

• Market equilibrium occurs when the quantity demanded equals the quantity supplied.
• The equilibrium price and quantity are determined by the intersection of the demand and supply curves.

Elasticity of Demand

• Elasticity of demand measures how responsive the quantity demanded is to a change in price.
• There are two types of elasticity:
  • Elastic demand: the quantity demanded changes significantly in response to a small change in price.
  • Inelastic demand: the quantity demanded changes very little in response to a small change in price.

Key Concepts

• The law of demand states that as the price increases, the quantity demanded decreases.
• A change in the price of a related good can shift the demand curve.
• A change in the number of buyers can shift the demand curve.
• A change in expectations can shift the demand curve.