Elasticity of Supply

When is a supply curve considered elastic? What are determinants of elasticity of supply? Let's compare Picasso paintings and toothpicks. Which has an elastic or inelastic supply? For which good could you increase production at a low cost? We also go over how to calculate the elasticity of supply, including using the midpoint formula.

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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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