Introduction to price elasticity of supply (video) | Khan Academy (2024)

Video transcript

- [Instructor] We've done many videos on the price elasticity of demand, now we're going to focus onthe price elasticity of supply. And it's a very similaridea, it's just being applied to supply now, it's ameasure of how sensitive our quantity supplied is topercent changes in price. And we will calculateit as our percent change in quantity supplied for a given, for a given percent change in price, percent change in price. Now, to make this alittle bit more tangible, let's look at a simple market, let's say this is the marketfor apples, right over here, where our vertical axis is price, and this could be thousandsof dollars per ton, and then our horizontalaxis is quantities, and maybe this is in tons per day. And this supply scheduleand this supply curve are essentially describing the same data. So, let's think about ourprice elasticity of supply as we go from point A,point A, to point B. Well, on the supply schedule,point A is this point right over here, our priceis four, our quantity is one. And point B is right over here. So let us calculatefrom point A to point B our price elasticity of supply. So, first of all, what is going to be our percent change in price? Well, we're going from four to six, so it's an increase of two, so our percent change in price is going to be equal to two, is how much we increasedfrom a base of four, times 100% and that of courseis going to be equal to a 50% increase in price. And then what is going to beour percent change in quantity? Well, we're going from one to two, so we're starting at a base of one. We are increasing by one,and then multiply that times 100%, that gives us 100%. So, when we have a 50% increase in price, that resulted goingfrom point A to point B, in a 100% increase in quantity supplied. So, 100% divided by 50%,that is going to give us, this is going to be equal to two. Now, what if we go frompoint B to point C? So, this is point C right over here. I encourage you, pause this video and see if you can calculatethe price elasticity of supply when going from point B to point C. Well, we're going to doa similar calculation. Our percent change in price. We start at a base of sixand we are increasing by two. So we're gonna multiply that times 100%. So that is approximately,this is 1/3 times 100%, so approximately 33.3%. And then what is our percentchange in quantity supplied? Well, we are going togo from two to three. So we start at a base oftwo, we increase by one. So plus one, and multiply times 100%. And so that's going to be given, it's going to be equal to 50%. And so when we have a 1/3 increase, or 33.3% increase in our price, we have a 50% increaseof our quantity supplied, when we go from point B topoint C right over here, and then one way to think about it is 50% divided by 1/3 is thesame thing as 50% times three, and so this is going to be equal to, this is going to be equal to 1.5. So, just as we saw when we calculated price elasticity of demand, either when you have a linear curve here, your price elasticityof supply can change. It is not the same thing as slope. Now another thing tokeep in mind is the way that I calculated price elasticityof supply in this video, which is arguably the simplest way, you would not get the same value when you're calculating themagnitude going from A to B than if you went from B to A. There are slightly moreadvanced techniques, the mid-point technique, for example, that will give you the same answer regardless of which direction you go in, but that's beyond thescope of this first video. Now, just as we discussedin the demand case, there are cases that you would consider to be more inelastic supply and cases where you would considerto be more elastic supply. So, one way to think about it is, if the magnitude of yourprice elasticity of supply is less than one, and ofcourse this is magnitude so it's going to be greaterthan or equal to zero, well, then you're talkingabout inelastic price elasticity of supply, inelastic. That's a situation inwhich our quantity supplied is not going to changeso much depending on, is not going to be so sensitiveto our change in price. Now, if our price elasticity of supply is greater than one,that's generally considered to be elastic, for a givenpercent change in price, you're getting a larger than that percent change in quantity supplied.