Price elasticity of supply

– Computes the percentage change in quantity supplied resulting from a 1 percent variation in price.

– The elasticity is usually positive as price and quantity supplied are directly associated.

We can refer to elasticity of supply with regard to interest rates, wage rates, and the cost of raw materials.

• Recall

• Elasticity of demand when price = $80 is

 Ep = 80/20 x -2/20 = -0.40

• Elasticity of demand when price = $100 is

 Ep = 100/18 x -2/20 = -0.56

• Elasticity of supply when price = $80 is

 Ep = 80/16 x 2/20 = 0.50

• Elasticity of supply when price = $100 is

 Ep = 100/18 x 2/20 = 0.56

• The Market for Wheat

– 1981 Supply Curve for Wheat

– QS = 1,800 + 240P

– 1981 Demand Curve for Wheat

– QD = 3,550 - 266P

– Equilibrium: Q S = Q D

1,800 + 240P = 3,550 - 266P

506P = 1,750

 P = 3.46/ bushel

 Q = 1,800 + (240)(3.46) = 2,630 million bushels

– Suppose the price of wheat is $4.00/bushel