Kinds of Elasticity of Supply, Economics CA CPT Video Lecture | Business Economics for CA Foundation

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- [Alex] In our last two videos,
we covered
the elasticity of demand.
We now turn
to the elasticity of supply.
The elasticity of supply measures
how responsive the quantity supplied
is to a change in the price.
So it's almost the same
as the elasticity of demand
except instead of measuring
the responsiveness
of the quantity demanded,
it measures the responsiveness
of the quantity supplied
to a change in price.
A supply curve is said
to be elastic
when an increase in price increases
the quantity supplied by a lot.
And similarly vice versa,
that is when a decrease in price
decreases
the quantity supplied by a lot
then we say
that the supply curve is elastic.
So when the quantity supplied
is very responsive to the price,
we say the supply curve is elastic.
When the same increase in price
increases the quantity supplied
by just a little
then the supply curve is said
to be inelastic.
So when the quantity supplied
doesn't vary very much
with the price,
the supply curve is inelastic.
Here, we show this on a graph,
so consider the first curve.
A $10 increase in price
on this curve --
here's the $10 increase in price --
increases the quantity supplied
from 80 to 85 units,
that is not by very much.
On the other hand, on this
more elastic supply curve,
the same $10 increase in price
increases the quantity supplied now
from 80 units to 170 units.
So you get a much bigger change
in the quantity supplied
from the same price increase
when the supply curve is elastic
compared to when it is inelastic.
And again as with demand curves,
elasticity is not
the same thing as slope.
Nevertheless,
when you have two curves
which go through a common point
then the one which is flatter
is more elastic
at any given quantity.
The one which is steeper
is more inelastic.
So we can always look at two curves
and say this curve is more elastic
than the steeper curve.
And that will work for everything
we're going to do in this class.
So what are the major determinants
of the elasticity of supply?
First and most importantly,
how do unit costs change
with increased production?
Second, the time horizon.
Third, share of market
for the inputs.
And fourth, geographic scope.
I'll explain each of these in turn.
The main determinant
of the elasticity of supply
is how quickly
per-unit costs increase
with an increase in production.
In particular,
if increased production
requires higher costs,
then the supply curve
will be inelastic.
It will be steep
if we're comparing two curves.
On the other hand,
if production can increase
with constant cost
or without increasing
per unit cost very much,
then the supply curve
will be elastic.
Let me give you two examples
to make this clear.
Compare the following two goods --
Picasso paintings and toothpicks.
Which has an inelastic supply
and which an elastic supply?
Okay, so let's think
about an increase in price.
For which good is it easier
to expand production?
For which good
can you increase production
at low cost
without pushing costs up?
Clearly, toothpicks.
So an increase
in the price of toothpicks --
and you can make
lots more toothpicks
just by running an additional log
down the sawmill.
Many, many more toothpicks
without an increase in cost.
On the other hand,
it's basically impossible
to get an increase in the production
of Picasso paintings.
He simply isn't producing anymore.
We may still have an increase
in the market supply
of Picasso paintings.
Some people who have them
in their homes
will put them onto the market.
But basically the supply
of Picasso paintings
is highly inelastic.
The price can go up
and up and up and up
and you're not going to get
very many more Picasso paintings.
Once again on the other hand,
if the price of toothpicks
goes up even a little bit,
you're going to get
a lot more toothpicks.
So the supply
of toothpicks is elastic
and the supply
of Picasso paintings is inelastic.
The time horizon influences
the elasticity of supply for a good.
and this is really
just a logical consequence
of the fact that elasticity
depends upon cost
and how easy it is
to expand production.
Immediately following
a price increase,
producers can expand
production or output
only by using
their current capacity,
so that tends
to make supply more inelastic.
So for example, if we're talking
about grain production.
If the price of grain goes up,
well farmers can get
a little bit more grain
out of their field by threshing,
by going over the fields
more carefully,
but they're not going
to get a lot more
until a year or two down the line,
until after they've had a chance
to plant more acres of grain.
On the other hand as I just said,
over time producers
can expand their capacity.
So in the short run,
the elasticity of supply
tends to be more inelastic
because it's harder
to expand output at the same cost.
Over time, however,
because producers
can expand their capacity,
the supply curve
tends to be more elastic.
So supply curve
tend to be more elastic,
the more time you give producers
to respond to the price.
The elasticity of supply
also depends
on whether the good in question
is a small or big demander
in its input markets.
That is the industry's share
of the demand for its inputs.
Let me explain.
Supply will tend to be more elastic
when the industry
is a small demander
in its input markets.
Because then supply can be expanded
without causing a big increase
in the demand
for the industry's inputs.
Let's go back
to the toothpick example.
One of the reasons why toothpicks
have an elastic supply
is because we can easily
double the supply of toothpicks
and have just a tiny impact
on the demand for wood
on the input into toothpicks.
So we can double
the supply of toothpicks
and since toothpicks are
just a small user of wood,
we don't require much more wood
so we're not going to increase
the demand for wood very much
when we increase
the demand for toothpicks.
Therefore the price of wood
is not going to be pushed up
when we demand more toothpicks.
Therefore the quantity
supplied of toothpicks
can easily increase
at the same price
without increasing
the cost of toothpicks.
On the other hand, supply
will tend to be inelastic
when the industry is a big demander
in its input markets.
So again suppose that the demand
for automobiles were to increase.
In order to expand
the supply of automobiles
we need more steel,
but automobiles
are a big demander of steel.
So when we want to increase
the supply of automobiles,
we're going to use a lot more steel
that's going to push up
the price of steel,
therefore that's going
to increase the price
of an input into making automobiles
which is going to push
the price of automobiles up.
Therefore the supply of automobiles
will tend to be more inelastic
because when we try and increase
the supply of automobiles,
we're going to increase
the price of steel
that increases the cost
of producing automobiles.
The geographic scope of the market
is another determinant
of the elasticity of supply.
In particular, the narrower
the scope of the market,
the more elastic the supply.
The wider the scope of the market,
the less elastic the supply.
For example, suppose that
the demand for gasoline increases
in Washington D.C.,
say more people are moving
to the D.C. region.
Well, that demand
can easily be supplied
by taking a little bit of gasoline
from elsewhere in the country
and we can increase
the supply of gasoline
in Washington, D.C. very easily
without pushing up the price
of gasoline hardly at all.
On the other hand,
if the worldwide demand
of gasoline went up
say because China
is becoming richer,
India is becoming richer.
They're buying more automobiles.
Well in that case, we're going
to have to dig for more oil.
We're going to have
to search for more oil.
That's going to be
much more expensive
to increase the supply
of gasoline to the world
than it is to increase
the supply of gasoline
to Washington, D.C.
Again, both of these
are simply a reflection
of the fundamental idea --
Does an increase
in the supply of a good,
does that require a big increase
in the cost of producing the good?
So it's very easy to increase
supply in Washington, D.C.
or in a particular state
and so forth.
It's much more difficult
to increase the total supply.
Okay. Let's summarize.
What makes a supply curve
more elastic?
Fundamentally,
a supply curve will be elastic
when it's easy
to increase production
at constant unit cost or when
it's easy to increase production
without increasing
the unit cost very much.
Supply curves tend to be
more elastic in the long run
compared to the short run.
They tend to be more elastic
when the good has a small share
of the market for its inputs,
so it doesn't raise
the price of its inputs
when the market expands.
And goods tend to be more elastic
when we're just talking
about the local supply of a good
rather than the global supply
which tends to be less elastic.
The elasticity of supply is defined
as the percentage change
in the quantity supplied
divided by the percentage change
in the price.
So, that's exactly the same
as for the elasticity of demand
with the exception being
that instead of talking
about the quantity demanded,
we're talking
about the quantity supplied.
In mathematical notation,
the elasticity supply
is the percentage,
delta for change in,
percent of change
in the quantity supplied
divided by the percent
of change in the price.
Here's an example.
If the price of cocoa rises by 10%
and the quantity supplied
increases by 3%,
then the elasticity of supply
for cocoa is:
So, elasticity percentage change
in quantity supplied, that's 3%,
divided by the percentage change
in the price, 10%.
So the elasticity must be 0.3.
Here's our midpoint formula.
Again practically the same as that
for the elasticity of demand,
only we're dealing
with the quantity supplied
rather than the quantity demanded.
So the percentage change
in quantity supplied
is the change in quantity supplied
divided by the average quantity
times 100.
The percentage change in price
is the change in price
divided by the average price
times 100.
The hundreds cancel out
so we're left with this formula
where the change in quantity
is quantity after
minus quantity before
over the average quantity.
Price after minus price before
over the average price.
Let's do an example.
At the initial price of $10,
the quantity supplied is 100.
When the price rises to $20,
the quantity supplied is 110.
So let's remember our formula --
change in quantity
over average quantity,
change in price over average price.
So the quantity after is 110,
the quantity before is 100,
so the change in quantity
is 110 minus 100.
This is the average quantity.
The change in price is 20 minus 10.
Just make sure
that since we started here
with the quantity after being 110,
that's associated
with the price after of 20
so put the 20 first.
20 minus 10 is 10
over the average price,
etc., etc., etc.
You can calculate the numbers
and what you find
is the elasticity is .143.
As with the elasticity of demand,
if the elasticity of supply
is less than one,
the supply curve
is said to inelastic.
If it's greater than one,
the supply curve
is said to be elastic.
If it's equal to one,
it's said to be unit elastic.
Okay, that's it for the mechanics
of the elasticity of supply.
What we're going to do next
is applications
of the elasticity of supply.
This is an extremely important
part of the course
so make sure you do follow
the applications,
learning how to apply
these ideas in the real world,
showing what
the real world consequences
of these different elasticities are
is extremely important.
That's what we're going to do next
and that will bring us back
to that question we asked
at the very beginning --
How can we analyze something
like the redemption of slaves,
whether this is going to be
a good policy or a bad policy?
The elasticity of supply
turns out to be critical
to understanding that question,
that's what we're going
to look at next.
Thanks.
- [Narrator] If you want
to test yourself,
click "Practice Questions."
Or if you're ready to move on,
just click "Next Video."
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