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- [Alex] In our last two videos,

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we covered
the elasticity of demand.

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We now turn
to the elasticity of supply.

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The elasticity of supply measures

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how responsive the quantity supplied
is to a change in the price.

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So it's almost the same
as the elasticity of demand

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except instead of measuring
the responsiveness

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of the quantity demanded,

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it measures the responsiveness
of the quantity supplied

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to a change in price.

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A supply curve is said
to be elastic

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when an increase in price increases
the quantity supplied by a lot.

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And similarly vice versa,

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that is when a decrease in price

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decreases
the quantity supplied by a lot

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then we say
that the supply curve is elastic.

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So when the quantity supplied
is very responsive to the price,

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we say the supply curve is elastic.

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When the same increase in price

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increases the quantity supplied
by just a little

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then the supply curve is said
to be inelastic.

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So when the quantity supplied

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doesn't vary very much
with the price,

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the supply curve is inelastic.

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Here, we show this on a graph,

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so consider the first curve.

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A $10 increase in price
on this curve --

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here's the $10 increase in price --

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increases the quantity supplied
from 80 to 85 units,

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that is not by very much.

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On the other hand, on this
more elastic supply curve,

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the same $10 increase in price

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increases the quantity supplied now

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from 80 units to 170 units.

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So you get a much bigger change
in the quantity supplied

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from the same price increase
when the supply curve is elastic

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compared to when it is inelastic.

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And again as with demand curves,

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elasticity is not
the same thing as slope.

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Nevertheless,
when you have two curves

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which go through a common point
then the one which is flatter

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is more elastic
at any given quantity.

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The one which is steeper
is more inelastic.

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So we can always look at two curves

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and say this curve is more elastic
than the steeper curve.

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And that will work for everything
we're going to do in this class.

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So what are the major determinants
of the elasticity of supply?

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First and most importantly,

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how do unit costs change
with increased production?

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Second, the time horizon.

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Third, share of market
for the inputs.

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And fourth, geographic scope.

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I'll explain each of these in turn.

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The main determinant
of the elasticity of supply

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is how quickly
per-unit costs increase

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with an increase in production.

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In particular,

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if increased production
requires higher costs,

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then the supply curve
will be inelastic.

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It will be steep
if we're comparing two curves.

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On the other hand,

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if production can increase
with constant cost

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or without increasing
per unit cost very much,

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then the supply curve
will be elastic.

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Let me give you two examples
to make this clear.

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Compare the following two goods --
Picasso paintings and toothpicks.

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Which has an inelastic supply
and which an elastic supply?

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Okay, so let's think
about an increase in price.

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For which good is it easier
to expand production?

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For which good
can you increase production

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at low cost
without pushing costs up?

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Clearly, toothpicks.

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So an increase
in the price of toothpicks --

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and you can make
lots more toothpicks

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just by running an additional log
down the sawmill.

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Many, many more toothpicks
without an increase in cost.

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On the other hand,
it's basically impossible

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to get an increase in the production
of Picasso paintings.

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He simply isn't producing anymore.

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We may still have an increase

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in the market supply
of Picasso paintings.

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Some people who have them
in their homes

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will put them onto the market.

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But basically the supply
of Picasso paintings

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is highly inelastic.

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The price can go up
and up and up and up

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and you're not going to get
very many more Picasso paintings.

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Once again on the other hand,

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if the price of toothpicks
goes up even a little bit,

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you're going to get
a lot more toothpicks.

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So the supply
of toothpicks is elastic

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and the supply
of Picasso paintings is inelastic.

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The time horizon influences
the elasticity of supply for a good.

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and this is really
just a logical consequence

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of the fact that elasticity
depends upon cost

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and how easy it is
to expand production.

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Immediately following
a price increase,

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producers can expand
production or output

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only by using
their current capacity,

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so that tends
to make supply more inelastic.

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So for example, if we're talking
about grain production.

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If the price of grain goes up,
well farmers can get

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a little bit more grain
out of their field by threshing,

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by going over the fields
more carefully,

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but they're not going
to get a lot more

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until a year or two down the line,

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until after they've had a chance
to plant more acres of grain.

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On the other hand as I just said,

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over time producers
can expand their capacity.

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So in the short run,
the elasticity of supply

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tends to be more inelastic

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because it's harder
to expand output at the same cost.

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Over time, however,

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because producers
can expand their capacity,

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the supply curve
tends to be more elastic.

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So supply curve
tend to be more elastic,

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the more time you give producers
to respond to the price.

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The elasticity of supply
also depends

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on whether the good in question
is a small or big demander

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in its input markets.

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That is the industry's share
of the demand for its inputs.

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Let me explain.

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Supply will tend to be more elastic

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when the industry
is a small demander

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in its input markets.

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Because then supply can be expanded
without causing a big increase

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in the demand
for the industry's inputs.

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Let's go back
to the toothpick example.

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One of the reasons why toothpicks
have an elastic supply

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is because we can easily
double the supply of toothpicks

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and have just a tiny impact
on the demand for wood

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on the input into toothpicks.

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So we can double
the supply of toothpicks

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and since toothpicks are
just a small user of wood,

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we don't require much more wood

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so we're not going to increase
the demand for wood very much

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when we increase
the demand for toothpicks.

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Therefore the price of wood
is not going to be pushed up

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when we demand more toothpicks.

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Therefore the quantity
supplied of toothpicks

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can easily increase
at the same price

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without increasing
the cost of toothpicks.

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On the other hand, supply
will tend to be inelastic

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when the industry is a big demander
in its input markets.

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So again suppose that the demand
for automobiles were to increase.

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In order to expand
the supply of automobiles

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we need more steel,

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but automobiles
are a big demander of steel.


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So when we want to increase
the supply of automobiles,

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we're going to use a lot more steel

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that's going to push up
the price of steel,

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therefore that's going
to increase the price

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of an input into making automobiles

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which is going to push
the price of automobiles up.

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Therefore the supply of automobiles
will tend to be more inelastic

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because when we try and increase
the supply of automobiles,

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we're going to increase
the price of steel

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that increases the cost
of producing automobiles.

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The geographic scope of the market
is another determinant

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of the elasticity of supply.

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In particular, the narrower
the scope of the market,

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the more elastic the supply.

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The wider the scope of the market,
the less elastic the supply.

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For example, suppose that
the demand for gasoline increases

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in Washington D.C.,

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say more people are moving
to the D.C. region.

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Well, that demand
can easily be supplied

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by taking a little bit of gasoline
from elsewhere in the country

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and we can increase
the supply of gasoline

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in Washington, D.C. very easily

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without pushing up the price
of gasoline hardly at all.

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On the other hand,

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if the worldwide demand
of gasoline went up

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say because China
is becoming richer,

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India is becoming richer.
They're buying more automobiles.

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Well in that case, we're going
to have to dig for more oil.

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We're going to have
to search for more oil.

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That's going to be
much more expensive

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to increase the supply
of gasoline to the world

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than it is to increase
the supply of gasoline

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to Washington, D.C.

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Again, both of these
are simply a reflection

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of the fundamental idea --

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Does an increase
in the supply of a good,

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does that require a big increase
in the cost of producing the good?

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So it's very easy to increase
supply in Washington, D.C.

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or in a particular state
and so forth.

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It's much more difficult
to increase the total supply.

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Okay. Let's summarize.

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What makes a supply curve
more elastic?

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Fundamentally,
a supply curve will be elastic

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when it's easy
to increase production

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at constant unit cost or when
it's easy to increase production

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without increasing
the unit cost very much.

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Supply curves tend to be
more elastic in the long run

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compared to the short run.

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They tend to be more elastic

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when the good has a small share
of the market for its inputs,

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so it doesn't raise
the price of its inputs

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when the market expands.

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And goods tend to be more elastic

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when we're just talking
about the local supply of a good

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rather than the global supply
which tends to be less elastic.

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The elasticity of supply is defined

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as the percentage change
in the quantity supplied

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divided by the percentage change
in the price.

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So, that's exactly the same
as for the elasticity of demand

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with the exception being
that instead of talking

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about the quantity demanded,

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we're talking
about the quantity supplied.

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In mathematical notation,
the elasticity supply

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is the percentage,
delta for change in,

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percent of change
in the quantity supplied

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divided by the percent
of change in the price.

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Here's an example.

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If the price of cocoa rises by 10%

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and the quantity supplied
increases by 3%,

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then the elasticity of supply
for cocoa is:

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So, elasticity percentage change
in quantity supplied, that's 3%,

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divided by the percentage change
in the price, 10%.

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So the elasticity must be 0.3.

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Here's our midpoint formula.

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Again practically the same as that
for the elasticity of demand,

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only we're dealing
with the quantity supplied

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rather than the quantity demanded.

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So the percentage change
in quantity supplied

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is the change in quantity supplied

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divided by the average quantity
times 100.

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The percentage change in price
is the change in price

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divided by the average price
times 100.

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The hundreds cancel out
so we're left with this formula

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where the change in quantity

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is quantity after
minus quantity before

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over the average quantity.

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Price after minus price before
over the average price.

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Let's do an example.

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At the initial price of $10,
the quantity supplied is 100.

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00:12:19,983 --> 00:12:24,053
When the price rises to $20,
the quantity supplied is 110.

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So let's remember our formula --

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change in quantity
over average quantity,

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00:12:27,460 --> 00:12:29,273
change in price over average price.

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So the quantity after is 110,

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00:12:33,372 --> 00:12:35,482
the quantity before is 100,

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00:12:35,482 --> 00:12:38,673
so the change in quantity
is 110 minus 100.

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This is the average quantity.

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The change in price is 20 minus 10.

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00:12:43,583 --> 00:12:46,483
Just make sure
that since we started here

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with the quantity after being 110,

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that's associated
with the price after of 20

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00:12:52,322 --> 00:12:53,814
so put the 20 first.

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20 minus 10 is 10
over the average price,

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etc., etc., etc.

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00:12:58,588 --> 00:13:00,590
You can calculate the numbers
and what you find

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00:13:00,590 --> 00:13:04,736
is the elasticity is .143.

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As with the elasticity of demand,

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if the elasticity of supply
is less than one,

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00:13:10,554 --> 00:13:12,664
the supply curve
is said to inelastic.

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00:13:12,664 --> 00:13:13,975
If it's greater than one,

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00:13:13,975 --> 00:13:16,094
the supply curve
is said to be elastic.

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00:13:16,094 --> 00:13:19,192
If it's equal to one,
it's said to be unit elastic.

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00:13:19,192 --> 00:13:23,715
Okay, that's it for the mechanics
of the elasticity of supply.

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00:13:23,715 --> 00:13:24,825
What we're going to do next

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is applications
of the elasticity of supply.

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00:13:28,262 --> 00:13:31,381
This is an extremely important
part of the course

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00:13:31,381 --> 00:13:33,734
so make sure you do follow
the applications,

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00:13:33,734 --> 00:13:37,020
learning how to apply
these ideas in the real world,

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00:13:37,020 --> 00:13:38,905
showing what
the real world consequences

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00:13:38,905 --> 00:13:42,593
of these different elasticities are
is extremely important.

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00:13:42,593 --> 00:13:44,735
That's what we're going to do next
and that will bring us back

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to that question we asked
at the very beginning --

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How can we analyze something
like the redemption of slaves,

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00:13:52,715 --> 00:13:56,146
whether this is going to be
a good policy or a bad policy?

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00:13:56,146 --> 00:13:58,935
The elasticity of supply
turns out to be critical

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00:13:58,935 --> 00:14:00,623
to understanding that question,

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00:14:00,623 --> 00:14:02,517
that's what we're going
to look at next.

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Thanks.

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- [Narrator] If you want
to test yourself,

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click "Practice Questions."

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00:14:08,727 --> 00:14:11,991
Or if you're ready to move on,
just click "Next Video."

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♪ [music] ♪