Price Elasticity of Supply

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Price Elasticity of Supply * Price Elasticity of Supply: * The degree of price elasticity of supply depends on how easily - and therefore quickly - producers can shift resources between alternative uses. Unlike PED, there is no Total Revenue Test for Price Elasticity of Supply. * Because there is a direct relationship between Price & Total revenue, they always move together.


THREE PERIODS: Market period--> short run --> long run * Price Elasticity of Supply: the Market Period: The period that occurs when the time immediately after a change in market price is too short for producers to respond with a change in quantity supplied. * Suppliers cannot be picky
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Decrease | Decrease | Indeterminate | Decrease |
Price Elasticity of Demand
The Price-Elasticity Coefficient and Formula: * Price elasticity of demand = consumers' responsiveness/sensitivity to a product's price change * A product is elastic if a small change in its price elicits very large changes in the quantity demanded. * * Movement on the demand curve ex. products that are not required in people's daily lives are often elastic products. (not necessity but luxury) * A product is inelastic if a big price change elicits very little influence on the quantity demanded. * Minimal movement on the demand curve * ex. products that are required in people's daily lives are often inelastic products. (not luxury but necessity)
It is important to keep in mind that elasticity involves percentage change in price and quantity demanded; not absolute change.

Midpoint Formula for calculating elasticity: * We use the formula in computing the price-elasticity coefficient. * Ex: A change of $4-$5 along a demand curve is a 25% increase, but the opposite price change from $5-$4 along the same curve is a 20% decrease. Since elasticity should be the same whether price rises or falls, the midpoint formula is needed. * This formula simply averages the two prices and the two quantities as the reference points for computing the percentages. * Ex: the reference point for the
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