Price elasticity of supply

Summary

This video delves into the concept of price elasticity of supply, explaining its definition and the factors that influence it. It explores how the responsiveness of quantity supplied to price changes can vary, leading to products being classified as price elastic or inelastic. Key determinants such as production time, factor availability, and stock levels are discussed. The video also demonstrates how to calculate price elasticity of supply using a formula and illustrates the concept on a supply curve diagram, highlighting the differences between elastic, inelastic, and perfectly elastic or inelastic supplies.

Takeaways

• 📈 Price elasticity of supply measures how responsive the quantity supplied is to changes in price.
• 🔍 Factors affecting price elasticity include the time it takes to produce the product, availability and mobility of production factors, and the presence of existing stocks.
• ⏱️ The longer it takes to produce a product, the more price inelastic the supply is likely to be.
• 🌐 The mobility of production factors, such as labor, plays a significant role in determining supply elasticity.
• 📦 Products with perishable goods or limited stock tend to have more price inelastic supply.
• 💡 Price elasticity of supply can be calculated by dividing the percentage change in quantity supplied by the percentage change in price, resulting in a positive coefficient.
• 🔑 A value greater than one indicates price elastic supply, showing a high responsiveness to price changes.
• 📉 Values between zero and one signify price inelastic supply, where the quantity supplied is less responsive to price changes.
• 🔄 Unitary elasticity occurs when a percentage change in price results in an equal percentage change in quantity supplied.
• 📊 The supply curve's steepness can visually represent the elasticity of supply; a flatter curve indicates more elastic supply, while a steeper curve indicates less elastic supply.

Q & A

What is price elasticity of supply?

Price elasticity of supply measures how responsive the quantity supplied of a product is to changes in its price. It indicates whether the supply is more price elastic or more price inelastic.

What factors affect the price elasticity of supply?

The factors affecting price elasticity of supply include the time it takes to produce the product, the availability and mobility of factors of production, and the availability of product stocks.

Why is the production time significant in determining price elasticity of supply?

Production time is significant because it influences how quickly a producer can respond to price changes. Products with longer production times tend to have more inelastic supply, while those with shorter production times can adjust more quickly and thus have more elastic supply.

How does the availability and mobility of factors of production impact price elasticity of supply?

The availability and mobility of factors of production affect price elasticity because if there are many available and easily redeployable workers, the supply can adjust more quickly to price changes, making it more elastic.

What is the role of product stocks in price elasticity of supply?

Product stocks play a role in price elasticity because businesses with large available stocks can quickly increase the quantity supplied in response to price increases, making the supply more elastic.

How is price elasticity of supply represented on a supply curve diagram?

Price elasticity of supply is represented on a supply curve diagram by the steepness of the curve. A relatively elastic supply is shown by a shallow gradient, while a relatively inelastic supply is shown by a steeper gradient.

What is the formula for calculating price elasticity of supply?

The formula for calculating price elasticity of supply is: (Percentage change in quantity supplied) / (Percentage change in price). The result is always positive due to the direct relationship between price and quantity supplied.

What does a value greater than one in price elasticity of supply indicate?

A value greater than one indicates price elastic supply, meaning the quantity supplied is very responsive to changes in price, with a larger percentage change in quantity supplied relative to the percentage change in price.

What does a value between zero and one in price elasticity of supply signify?

A value between zero and one signifies price inelastic supply, where the change in quantity supplied is smaller in relation to the change in price, indicating a less responsive supply to price changes.

What are the theoretical extremes for price elasticity of supply?

The theoretical extremes for price elasticity of supply are perfectly inelastic supply, indicated by a value of zero, and perfectly elastic supply, indicated by a value of positive infinity. Perfectly inelastic supply means no change in quantity supplied regardless of price changes, while perfectly elastic supply means infinite responsiveness to price changes.

Can you provide an example of calculating price elasticity of supply?

An example given in the script is for a t-shirt manufacturer where the price increases from £8 to £10, leading to a 50% increase in quantity supplied. The price elasticity of supply is calculated as 50% / 25% = 2, indicating price elastic supply.

Outlines

00:00

📈 Understanding Price Elasticity of Supply

This paragraph introduces the concept of price elasticity of supply, explaining how it measures the responsiveness of the quantity supplied to changes in price. It differentiates between price elastic and price inelastic supply, using examples like hot dogs and passenger jets to illustrate the impact of production time on elasticity. Factors influencing price elasticity of supply are discussed, including production time, availability and mobility of factors of production, and the existence of product stocks. The paragraph concludes with a formula for calculating price elasticity of supply, which is the percentage change in quantity supplied divided by the percentage change in price, resulting in a positive coefficient due to the direct relationship between price and quantity supplied.

05:02

📊 Analyzing Different Types of Price Elasticity of Supply

This paragraph delves into the different types of price elasticity of supply, ranging from perfectly inelastic to perfectly elastic. It explains that a value greater than one indicates price elastic supply, where quantity supplied is highly responsive to price changes. Conversely, a value between zero and one signifies price inelastic supply, where changes in quantity supplied are less responsive to price changes. A unitary elasticity, where the percentage change in quantity supplied equals the percentage change in price, results in a value of one. The paragraph uses the example of a t-shirt manufacturer to demonstrate how to calculate price elasticity of supply, resulting in a positive two, indicating price elastic supply. The discussion also includes how these concepts apply to supply curve diagrams, with price elastic supply represented by a shallow gradient and price inelastic supply by a steeper gradient, leading to the extremes of horizontal lines for perfectly elastic supply and vertical lines for perfectly inelastic supply.

Keywords

💡Price Elasticity of Supply

Price Elasticity of Supply refers to the degree to which the quantity supplied of a good responds to a change in its price. It is a measure of the responsiveness of suppliers to price changes. In the video, this concept is central as it helps to understand how producers adjust their output in response to market price fluctuations. For instance, the video explains that a hot dog manufacturer can increase production quickly in response to a price rise, indicating a high price elasticity of supply.

💡Price Elastic

Price elastic supply implies that the quantity supplied of a product is highly responsive to changes in price. If the price increases, suppliers can significantly increase their output, and vice versa. The video uses the example of t-shirts, where a price increase from £8 to £10 leads to a 50% increase in quantity supplied, demonstrating a high degree of price elasticity.

💡Price Inelastic

Price inelastic supply means that the quantity supplied of a product does not change significantly in response to price changes. This could be due to the time it takes to produce the product or the specialized nature of the production process. The video contrasts this with the example of passenger jets, where it takes years to increase production in response to price changes, showing a low price elasticity of supply.

💡Unitary Price Elasticity of Supply

Unitary price elasticity of supply occurs when a change in price leads to an equal proportional change in quantity supplied. This indicates a one-to-one relationship between price and quantity supplied. The video script mentions this as a specific case where, for example, a 10% increase in price would result in a 10% increase in quantity supplied.

💡Time

Time is a critical factor affecting price elasticity of supply. The longer it takes to produce a product, the more likely the supply is to be price inelastic. The video uses the example of hot dogs versus passenger jets to illustrate this, where the latter, due to the time required for production, has a more inelastic supply.

💡Availability and Mobility of Factors of Production

The availability and mobility of factors of production, such as labor and raw materials, influence the price elasticity of supply. If it's easy to switch workers to a particular product or if there's a surplus of labor, the supply can be more elastic. The video contrasts this with specialized production like passenger jets, where the supply is more inelastic due to the specialized nature of the workforce.

💡Stock Availability

Stock availability refers to the presence of existing inventories that can be quickly brought to market in response to price changes. Products with perishable outputs, like agricultural goods, often have less stock available and thus tend to have a more inelastic supply, as explained in the video.

💡Percentage Change

The calculation of price elasticity of supply involves determining the percentage change in quantity supplied and the percentage change in price. The video provides a formula to calculate this elasticity, which is crucial for understanding how responsive suppliers are to price changes. For example, a 50% increase in the quantity supplied in response to a 25% price increase results in a price elasticity of supply of 2.

💡Supply Curve

The supply curve is a graphical representation of the relationship between the price of a good and the quantity supplied. In the context of the video, a price elastic supply is depicted as a flatter curve, indicating that a small price increase leads to a significant increase in quantity supplied. Conversely, a steeper curve represents a price inelastic supply, where price changes have a smaller impact on quantity supplied.

💡Perfectly Elastic Supply

Perfectly elastic supply is a theoretical concept where any change in price results in an infinite change in quantity supplied. This is represented by a horizontal line on the supply curve, indicating that even a slight decrease in price leads to a complete cessation of supply. The video uses this concept to illustrate the extreme end of the elasticity spectrum.

💡Perfectly Inelastic Supply

Perfectly inelastic supply is another theoretical extreme where changes in price have no effect on the quantity supplied. This is depicted as a vertical line on the supply curve, showing that the quantity supplied remains constant regardless of price changes. The video uses this to contrast with perfectly elastic supply and to illustrate the concept of inelasticity.

Highlights

Price elasticity of supply measures how responsive quantity supplied is to changes in price.

Products with price elastic supply respond quickly and easily to price changes.

Price inelastic supply refers to products that take longer to respond to price changes.

Unitary price elasticity of supply means a proportional change in quantity supplied with price changes.

The time it takes to make a product is a key factor affecting price elasticity of supply.

Hot dog manufacturers can rapidly increase production in response to price increases, indicating price elastic supply.

Passenger jet manufacturers cannot quickly increase production, indicating price inelastic supply.

Availability and mobility of factors of production influence price elasticity of supply.

It's easier to switch workers to produce hot dogs than to produce specialized products like passenger jets.

The availability of product stocks affects price elasticity; perishable goods tend to have inelastic supply.

Agricultural output is often price inelastic due to the perishable nature of many products.

The formula for calculating price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.

A coefficient greater than one indicates price elastic supply.

A coefficient between zero and one indicates price inelastic supply.

A coefficient equal to one indicates unitary price elasticity of supply.

Perfectly inelastic supply would have a coefficient of zero, showing no change in quantity supplied with price changes.

Perfectly elastic supply would have a coefficient of infinity, showing an infinite response in quantity supplied to price changes.

An example calculation shows t-shirts have price elastic supply with a coefficient of two.

Price elastic supply is represented by a shallow gradient on the supply curve diagram.

Price inelastic supply is represented by a steep gradient on the supply curve diagram.

Perfectly elastic supply is represented by a horizontal line on the supply curve diagram.

Perfectly inelastic supply is represented by a vertical line on the supply curve diagram.

Transcripts

in this video we'll be looking at price

elasticity of supply so we're going to

be looking at what it is

and the factors that are going to affect

price elasticity of supply so what's

going to cause the supply for a product

to be

more price elastic or more price

inelastic

and then we're going to see how we can

show this on a diagram and also

calculate price elasticity of supply

so when we looked at the idea of supply

generally we said that producers would

respond

to changes in price so if price was to

increase

producers are going to be incentivized

to increase their quantity supplied

in order to take advantage of the higher

prices which will deliver them higher

profits

with price elasticity of supply we're

talking about just how responsive that

quantity supplied is

to those changes in price and because

with some products

quantity supplied is going to be quite

responsive so it's going to respond

quite quickly and quite easily to those

changes in price and we call those

products

price elastic i would say they have

price elastic supply

and for others quantity supplied is

going to be relatively

unresponsive to changes in price so it's

going to take produce a little bit

longer

um to respond to any price changes and

we'll talk about price inelastic supply

for those products and finally we might

also mention products which have unitary

price elasticity of supply

and those are products for which you get

a change in price and that leads to

a proportional change in quantity

supplied so for example a 10

increase in price would lead to a 10

increase in quantity supplied

so there are a few factors that will

determine whether that supply for a

product is likely to be more price

elastic or more price inelastic and i'd

say probably the most important of these

is about time how long does it take

to make the product and the longer it

takes

the more price inelastic supply is

likely to be

so take a hot dog manufacturer a company

that makes hot dogs

and imagine the market price of hot dogs

were to increase quite significantly

they could probably increase their

production quite rapidly

so they could respond to that price

increase quite quickly so

supply for for that type of product

would be more likely

to be price elastic but if you take a

manufacturer of

passenger jets and you imagine that

airlines

are willing to pay a lot more for

passenger jets and the price of those

was to increase

then they can't just increase their

quantity supplied of passenger jets

really really quickly

it's going to take years probably for

them to expand that production

and increase the quantity supplied to

the supply for those sorts of goods

is more likely to be price inelastic

and there are a few other factors as

well so you might have the availability

mobility

of factors of production and so for some

goods it's

um firms have a lot of available workers

that they can just call on to expand

their supply

and particularly the case if it's quite

easy to switch workers from other

production

into the production of those goods so

that will probably work actually with

the same example as well

i imagine it would be relatively easy to

switch workers from producing other

similar foodstuffs

into producing hot dogs whereas

production of passenger decks is quite

specialized

and so it's more difficult to call on

sort of engineers

and those um factors of production and

that quite specialized labor

and so the supply for those sorts of

goods again is likely to be more price

inelastic whereas if it's easier to call

on those factors of production

um then supply is likely to be more

price elastic

and finally here we've got the

availability of the stocks of a product

so if you've got lots of available

stocks or a business has lots of

available stocks or a product that they

can just release

as price increases then it's more likely

to be price elastic

and this is the reason why a lot of

agricultural output

quite often is relatively price

inelastic in supply because a lot of

that output

is quite perishable so you can't store

it for long periods of time

and then just release that output as

price increases so that makes it more

price inelastic

and so your formula for calculating

price elasticity of supply then

you take your percentage change in

quantities that are supplied and divide

it by a percentage change

in price and that's going to give you

your coefficient which this time is

always going to be

positive and the reason for that is

because of the the direct relationship

between

the change in price and the change in

quantity supplied so if price was to

increase

here then quantity supplied is going to

increase here because of that

producer's response to the incentives of

rising prices

if the price was to decrease then the

quantity supplied is going to decrease

in response so you're always going to

have a positive figure

that figures greater than one then

that's showing us price

elastic supply and that's because price

elastic supplies when quantity supplied

is very responsive to changes in price

so your figure at the top of the formula

is going to be bigger

than your figure at the bottom of the

formula which is going to give you a

value greater than positive one

price inelastic supply is when the

change in quantity supplied is going to

be

um smaller in relation to the change in

price

and so that's going to give you a value

of between naught and positive one

unitary it's going to be equal to one

because you're going to be doing for

example

a 10 change in price causing a 10 change

in quantity supplied which is always

going to give you a figure of one

and then our kind of theoretical

extremes for price elasticity of supply

perfectly inelastic would give you a

value

of zero because any change in price is

going to have

no impact at all on quantity supplied

and then

the other extreme you've got perfectly

elastic supply

where changes in price are going to have

infinite impacts on

quantity supplied and so positive

infinity would be your value for

perfectly elastic supply

and so just to look at a quick example

then for price elasticity of supply

imagine you've got a manufacturer of

t-shirts the price of t-shirts increases

from eight pounds to ten pounds

and that results in a fifty percent

increase in quantity supplied in

response to that

well how do we work that out well first

of all we need to work out the

percentage change

in price which quite simply there you

can see is 25

and then we take our 50 increase in

quantity supplied

divided by our 25

increase in price which gives us a value

of positive two price elasticity of

supply

always going to be positive and so

positive two

and that shows that we've got price

elastic supply for t-shirts so it's

relatively easy for the t-shirt

manufacturers to respond

to that increase in price by increasing

their quantity supplied

and the value being greater than one

shows us price elastic supply

i'm thinking about how you could apply

those different interpretations from

price elasticity of supply

onto our supply curve diagram firstly

relatively elastic supply price elastic

supply

you would see a relatively shallow

gradient to your supply curve

and so that's showing you that

relatively small

increase in price would read along

to quite significant increase

in your quantity supplied on your supply

curve

diagram compared to that relatively

inelastic supply

would show even quite big changes in

price

having only quite small impacts

on the quantity supplied so that is a

steeper gradient of curve

and then you've got your extremes with

perfectly elastic supply

and that's going to be a horizontal line

so even for example the most

fractional decrease in price would take

quantity supplied immediately to zero

and then finally you've got your

perfectly inelastic supply

which is going to be a vertical line so

any change in price along this axis is

going to have

no impact at all on your quantity

supplied

you