Elasticity of Supply
-
0:02 - 0:04♪ [music] ♪
-
0:10 - 0:12- In our last two videos,
-
0:12 - 0:15we covered
the elasticity of demand. -
0:15 - 0:22We now turn
to the elasticity of supply. -
0:22 - 0:25The elasticity of supply measures
-
0:25 - 0:27how responsive quantity supplied is
to a change in the price. -
0:27 - 0:30So it's almost the same
as the elasticity of demand -
0:30 - 0:34except instead of measuring
the responsiveness -
0:34 - 0:37of the quantity demanded,
-
0:37 - 0:40it measures the responsiveness
of the quantity supplied -
0:40 - 0:44to a change in price.
-
0:44 - 0:47A supply curve is said
to be elastic -
0:47 - 0:50when an increase in price increases
the quantity supplied by a lot. -
0:50 - 0:53And similarly vice versa,
-
0:53 - 0:55that is when a decrease in price
-
0:55 - 0:58decreases the quantity supplied
by a lot then we say -
0:58 - 1:01that the supply curve is elastic.
-
1:01 - 1:04So when the quantity supplied
is very responsive to the price, -
1:04 - 1:06we say the supply curve is elastic.
-
1:06 - 1:09When the same increase price
-
1:09 - 1:11increases the quantity supplied
by just a little -
1:11 - 1:14then the supply curve is said
to be inelastic. -
1:14 - 1:18So when the quantity supplied
-
1:18 - 1:21doesn't vary very much
with the price, -
1:21 - 1:26the supply curve is inelastic.
-
1:26 - 1:29Here, we show this on a graph
so consider the first curve -
1:29 - 1:33a $10 increase in price
on this curve. -
1:33 - 1:36Here's the $10 increase in price
increases the quantity supplied -
1:36 - 1:42from 80 to 85 units,
that is not by very much. -
1:43 - 1:47On the other hand, on this
more elastic supply curve, -
1:47 - 1:50the same $10 increase in price
increases the quantity supplied now -
1:50 - 1:57from 80 units to 170 units.
-
1:57 - 2:00So you get a much bigger change
in the quantity supplied -
2:00 - 2:03from the same price increase
when the supply curve is elastic -
2:03 - 2:08compared to when it is inelastic.
-
2:08 - 2:11And again as with demand curves,
-
2:11 - 2:14elasticity is not
the same thing as slope. -
2:14 - 2:16Nevertheless,
when you have two curves -
2:16 - 2:19which go through a common point
than the one which is flatter -
2:19 - 2:24is more elastic
at any given quantity. -
2:24 - 2:26The one which is steeper
is more inelastic. -
2:26 - 2:29So we can always look at two curves
-
2:29 - 2:31and say this curve is more elastic
than the steeper curve. -
2:31 - 2:34And that will work for everything
we're going to do in this class. -
2:34 - 2:40So what are the major determinants
of the elasticity of supply? -
2:40 - 2:46First and most importantly,
how do unit costs change -
2:47 - 2:49with increased production?
-
2:49 - 2:50Second, the time horizon.
-
2:50 - 2:52Third, share of markets
for the inputs. -
2:52 - 2:56And fourth, geographic scope.
-
2:56 - 2:59I'll explain each of these in turn.
-
2:59 - 3:03The main determinant
of the elasticity of supply -
3:03 - 3:06is how quickly
per-unit costs increase -
3:06 - 3:09with an increase in production.
-
3:09 - 3:12In particular,
-
3:12 - 3:14if increased production
requires higher costs, -
3:14 - 3:17then the supply curve
will be inelastic. -
3:17 - 3:20It will be steep
if we're comparing two curves. -
3:20 - 3:23On the other hand,
-
3:23 - 3:26if production can increase
with constant cost -
3:26 - 3:29or without increasing
per unit cost very much, -
3:29 - 3:32then the supply curve
will be elastic. -
3:32 - 3:35Let me give you two examples
to make this clear. -
3:35 - 3:38Compare the following two goods,
Picasso paintings and toothpicks. -
3:38 - 3:41Which has an inelastic supply
and which an elastic supply? -
3:41 - 3:50Okay, so let's think
about an increase in price. -
3:50 - 3:52For which good is it easier
to expand production? -
3:52 - 3:55For which good
can you increase production -
3:55 - 3:58at low cost
without pushing costs up? -
3:58 - 4:01Clearly, toothpicks.
-
4:01 - 4:02So an increase
in the price of toothpicks -
4:02 - 4:05and you can make
lots more toothpicks -
4:05 - 4:07just by running an additional log
down the sawmill. -
4:07 - 4:10Many, many more toothpicks
without an increase in cost. -
4:10 - 4:16On the other hand,
it's basically impossible -
4:16 - 4:21to get an increase in the production
of Picasso paintings. -
4:21 - 4:25He simple isn't producing any more.
-
4:25 - 4:26We may still have an increase
-
4:26 - 4:28in the market supply
of Picasso paintings. -
4:28 - 4:30Some people who have them
in their homes -
4:30 - 4:33will put them on to the market.
-
4:33 - 4:34But basically the supply
of Picasso paintings -
4:34 - 4:37is highly inelastic.
-
4:37 - 4:40The price can go up
and up and up and up -
4:40 - 4:46and you're not going to get
very many more Picasso paintings. -
4:46 - 4:48Once again on the other hand,
-
4:48 - 4:51if the price of toothpicks
goes up even a little bit, -
4:51 - 4:53you're going to get
a lot more toothpicks. -
4:53 - 4:56So the supply
of toothpicks is elastic -
4:56 - 5:01and the supply
of Picasso paintings is inelastic. -
5:01 - 5:04The time horizon influences
the elasticity of supply -
5:04 - 5:09for a good and this is really
just a logical consequence -
5:09 - 5:12of the fact that elasticity
depends upon cost -
5:12 - 5:15and how easy it is
to expand production. -
5:15 - 5:18Immediately following
a price increase, -
5:18 - 5:21producers can expand
production or output -
5:21 - 5:24only by using
their current capacity, -
5:24 - 5:27so that tends
to make supply more inelastic. -
5:27 - 5:33So for example, if we're talking
about grain production. -
5:34 - 5:35If the price of grain goes up,
well farmers can get -
5:35 - 5:38a little bit more grain
out of their field by threshing, -
5:38 - 5:39by going over the fields
more carefully, -
5:39 - 5:42but they're not going
to get a lot more -
5:42 - 5:48until a year or two down the line
-
5:48 - 5:52until after they've had a chance
to plant more acres of grain. -
5:52 - 5:55On the other hand as I just said,
-
5:55 - 5:58over time producers
can expand their capacity. -
5:58 - 6:01So in the short run,
the elasticity of supply -
6:01 - 6:05tends to be more inelastic
-
6:05 - 6:08because it's harder
to expand output at the same cost. -
6:08 - 6:10Over time, however,
-
6:10 - 6:13because producers
can expand their capacity -
6:13 - 6:16the supply curve
ends to be more elastic. -
6:16 - 6:19So supply curve
tend to be more elastic, -
6:19 - 6:24the more time you give producers
to respond to the price. -
6:24 - 6:27The elasticity of supply
also depends -
6:27 - 6:30on whether the good in question
is a small or big demander -
6:30 - 6:33in its input markets.
-
6:33 - 6:35That is the industry's share
of the demand for its inputs. -
6:35 - 6:38Let me explain. Supply will tend
to be more elastic -
6:38 - 6:42when the industry
is a small demander -
6:42 - 6:45in its input markets.
-
6:45 - 6:49Because then supply can be expanded
without causing a big increase -
6:49 - 6:52in the demand
for the industry's inputs. -
6:52 - 6:55Let's go back
to the toothpick example. -
6:55 - 6:59One of the reasons why toothpicks
has an elastic supply -
6:59 - 7:02is because we can easily
double the supply of toothpicks -
7:02 - 7:09and have just a tiny impact
on the demand for wood -
7:09 - 7:11on the input into toothpicks.
-
7:11 - 7:14So we can double
the supply of toothpicks -
7:14 - 7:16and since toothpicks are
just a small user of wood, -
7:16 - 7:19we don't require much more wood
-
7:19 - 7:23so we're not going to increase
the demand for wood very much -
7:23 - 7:24when we increase
the demand for toothpicks. -
7:24 - 7:29Therefore the price of wood
is not going to be pushed up -
7:29 - 7:33when we demand more toothpicks.
-
7:33 - 7:36Therefore the quantity
supplied of toothpicks -
7:36 - 7:39can easily increase
at the same price -
7:39 - 7:42without increasing
the cost of toothpicks. -
7:42 - 7:46On the other hand, supply
will tend to be inelastic -
7:47 - 7:49when the industry is a big demander
in its input markets. -
7:49 - 7:52So again suppose that the demand
for automobiles were to increase. -
7:52 - 7:57In order to expand
the supply of automobiles -
7:57 - 7:58we need more steel,
-
7:58 - 8:00but automobiles
are a big demander of steel. -
8:00 - 8:04So when we want to increase
the supply of automobiles, -
8:05 - 8:09we're going to use a lot more steel
-
8:09 - 8:11that's going to push up
the price of steel, -
8:11 - 8:14therefore that's going
to increase the price -
8:14 - 8:16of an input into making automobiles
-
8:16 - 8:19which is going to push
the price of automobiles up. -
8:19 - 8:24Therefore the supply of automobiles
will tend to be more inelastic -
8:24 - 8:27because when we try and increase
the supply of automobiles, -
8:27 - 8:30we're going to increase
the price of steel -
8:30 - 8:33that increases the cost
of producing automobiles. -
8:33 - 8:36The geographic scope of the market
is another determinant -
8:36 - 8:38of the elasticity of supply.
-
8:38 - 8:41In particular, the narrower
the scope of the market, -
8:41 - 8:44the more elastic the supply.
-
8:44 - 8:47The wider the scope of the market,
the less elastic the supply. -
8:47 - 8:53For example, suppose that
the demand for gasoline increases -
8:53 - 8:56in Washington D.C.,
-
8:56 - 8:59say more people are moving
to the D.C. region. -
8:59 - 9:03Well, that demand
can easily be supplied -
9:03 - 9:06by taking a little bit of gasoline
from elsewhere in the country -
9:06 - 9:10and we can increase
the supply of gasoline -
9:10 - 9:12in Washington, D.C. very easily
-
9:12 - 9:15without pushing up the price
of gasoline hardly at all. -
9:15 - 9:18On the other hand,
-
9:18 - 9:21if the worldwide demand
of gasoline went up -
9:21 - 9:22say because China
is becoming richer, -
9:22 - 9:23India is becoming richer.
-
9:23 - 9:24They're buying more automobiles.
-
9:24 - 9:29Well in that case, we're going
to have to dig for more oil. -
9:29 - 9:30We're going to have
to search for more oil. -
9:30 - 9:33That's going to be
much more expensive -
9:33 - 9:35to increase the supply
of gasoline to the world -
9:35 - 9:38than it is to increase
the supply of gasoline -
9:38 - 9:41to Washington, D.C.
-
9:41 - 9:42Again, both of these
are simply a reflection -
9:42 - 9:44of the fundamental idea.
-
9:44 - 9:50Does an increase
in the supply of a good, -
9:50 - 9:53does that require a big increase
in the cost of producing the good? -
9:53 - 9:56So it's very easy to increase
supply in Washington, D.C. -
9:56 - 10:00or in a particular state
and so forth. -
10:00 - 10:04It's much more difficult
to increase the total supply. -
10:04 - 10:07Okay. Let's summarize.
-
10:07 - 10:09What makes a supply curve
more elastic? -
10:09 - 10:12Fundamentally,
a supply curve will be elastic -
10:12 - 10:14when it's easy
to increase production -
10:14 - 10:17at constant unit cost or when
it's easy to increase production -
10:17 - 10:22without increasing
the unit cost very much. -
10:22 - 10:24Supply curves tend to be
more elastic in the long run -
10:24 - 10:27compared to the short run.
-
10:27 - 10:31They tend to be more elastic
-
10:31 - 10:34when the good has a small share
of the market for its inputs, -
10:34 - 10:35so it doesn't raise
the price of its inputs -
10:35 - 10:37when the market expands.
-
10:37 - 10:39And goods tend to be more elastic
-
10:39 - 10:44when we're just talking
about the local supply of a good -
10:44 - 10:47rather than the global supply
which tends to be less elastic. -
10:47 - 10:50The elasticity of supply is defined
-
10:50 - 10:55as the percentage change
in the quantity supplied -
10:55 - 10:57divided by the percentage change
in the price. -
10:57 - 11:00So, that's exactly the same
as for the elasticity of demand -
11:00 - 11:01with the exception being
that instead of talking -
11:01 - 11:03about the quantity demanded,
-
11:03 - 11:07we're talking
about the quantity supplied. -
11:07 - 11:08In mathematical notation,
the elasticity supply -
11:08 - 11:09is the percentage,
delta for change in, -
11:09 - 11:11percent of change
in the quantity supplied -
11:15 - 11:16divided by the percent
of change in the price. -
11:16 - 11:18Here's an example.
-
11:18 - 11:21If the price of cocoa rises by 10%
-
11:21 - 11:24and the quantity supplied
increases by 3%, -
11:24 - 11:27then the elasticity of supply
for cocoa is? -
11:27 - 11:30So, elasticity percentage change
in quantity supplied, that's 3%, -
11:30 - 11:35divided by the percentage change
in the price, 10%. -
11:35 - 11:40So the elasticity must be 0.3.
-
11:40 - 11:43Here's our midpoint formula.
-
11:43 - 11:47Again practically the same as that
for the elasticity of demand, -
11:47 - 11:48only we're dealing
with the quantity supplied -
11:48 - 11:49rather than the quantity demanded.
-
11:49 - 11:51So percentage change
in quantity supplied -
11:51 - 11:55is the change in quantity supplied
-
11:55 - 11:56divided by the average quantity
times 100. -
11:56 - 11:59The percentage change in price
is the change in price -
11:59 - 12:00divided by the average price
times 100. -
12:00 - 12:03The hundreds cancel out
so we're left with this formula -
12:03 - 12:05where the change in quantity
-
12:05 - 12:08is quantity
after minus quantity before -
12:08 - 12:11over the average quantity.
-
12:11 - 12:14Price after minus price
before over the average price. -
12:14 - 12:17Let's do an example.
-
12:17 - 12:20At the initial price of $10,
the quantity supplied is 100. -
12:20 - 12:22When the price rises to $20,
the quantity supplied is 110. -
12:22 - 12:25So let's remember our formula,
-
12:25 - 12:28change in quantity
over average quantity, -
12:29 - 12:34change in price over average price.
-
12:34 - 12:37So the quantity after is 110,
the quantity before is 100, -
12:37 - 12:42so the change in quantity
is 110 minus 100. -
12:42 - 12:46This is the average quantity.
-
12:46 - 12:47The change in price is 20 minus 10.
-
12:47 - 12:49Just make sure
that since we started here -
12:49 - 12:52with the quantity after being 110,
-
12:52 - 12:53that's associated
with the price after of 20 -
12:53 - 12:55so put the 20 first.
-
12:55 - 12:5620 minus 10 is 10
over the average price, -
12:56 - 12:57etc., etc., etc.
-
12:57 - 13:00You can calculate the numbers
and what you find -
13:00 - 13:05is the elasticity is .143.
-
13:05 - 13:08As with the elasticity of demand,
-
13:08 - 13:10if the elasticity of supply
is less than one, -
13:10 - 13:13the supply curve
is said to inelastic. -
13:13 - 13:14If it's greater than one,
-
13:14 - 13:17the supply curve
is said to be elastic. -
13:17 - 13:20If it's equal to one,
it's said to be unit elastic. -
13:20 - 13:23Okay, that's it for the mechanics
of the elasticity of supply. -
13:23 - 13:25What we're going to do next
-
13:25 - 13:28is applications
of the elasticity of supply. -
13:28 - 13:30This is an extremely important
part of the course -
13:30 - 13:33so make sure you do follow
the applications, -
13:33 - 13:37learning how to apply
these ideas in the real world, -
13:38 - 13:40showing what
the real world consequences -
13:40 - 13:43of these different elasticities are
is extremely important. -
13:43 - 13:44That's what we're going to do next
and that will bring us back -
13:46 - 13:49to that question we asked
at the very beginning, -
13:49 - 13:52how can we analyze something
like the redemption of slaves -
13:52 - 13:57whether this is going to be
a good policy or a bad policy? -
13:57 - 13:58The elasticity of supply
turned out to be critical -
13:58 - 14:01to understanding that question,
-
14:01 - 14:02that's what we're going
to look at next. -
14:02 - 14:04Thanks.
-
14:04 - 14:07- [Narrator] If you want
to test yourself, -
14:07 - 14:10click Practice questions.
-
14:10 - 14:13Or if you're ready to move on,
just click Next Video. -
14:13 - 14:15♪ [music] ♪
- Title:
- Elasticity of Supply
- Description:
-
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.
Microeconomics Course: http://mruniversity.com/courses/principles-economics-microeconomics
Ask a question about the video: http://mruniversity.com/courses/principles-economics-microeconomics/elasticity-supply-midpoint-formula#QandA
Next video: http://mruniversity.com/courses/principles-economics-microeconomics/elasticity-example-slave-redemption-sudan
- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 14:18
Marilia_PM edited English subtitles for Elasticity of Supply | ||
Retired user edited English subtitles for Elasticity of Supply | ||
Retired user edited English subtitles for Elasticity of Supply | ||
Retired user edited English subtitles for Elasticity of Supply | ||
Retired user edited English subtitles for Elasticity of Supply | ||
Retired user edited English subtitles for Elasticity of Supply | ||
MRU2 edited English subtitles for Elasticity of Supply | ||
MRU2 edited English subtitles for Elasticity of Supply |