5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

Price Elasticity of Supply

Now that we have addressed the sensitivity of consumer consumption of good X, let us dis-

cuss elasticity from the supplier’s perspective. When the price of good X changes, we expect

quantity supplied to change. The law of supply predicts that as the price of good X

increases, so too does quantity supplied. But what we do not know is, “by how much?” The

price elasticity of supply helps to measure this response.

Price Elasticity of Supply Formula

Es=(%Din quantity supplied of good X)/(% Din the price of good X)

Note:The law of supply ensures that Esis positive. The greater this ratio, the more sensi-

tive, or responsive, suppliers are to a change in the price of good X.

The Element of Time

Perhaps the most important determinant of how price elastic suppliers are in a particular

industry is the time that it takes suppliers to change the quantity supplied once the price

of the good itself has changed. This flexibility, of course, is different for different types of

producers.

Example:

A local attorney produces hours of legal service in a small Midwestern town from

her small office. At the current market price, for an hour of legal advice, she

works a 40-hour workweek with the help of one clerical employee. If the price

of an hour of legal assistance rises by 10 percent in the local market, initially

our attorney responds by working a few additional minutes each weekday

evening and on Saturday, but the constraints of the calendar allow for only an

increase of 5 percent in the hours that she supplies.

Short-term Es =5%/10% = .5

If this higher price is maintained for a month or two, the attorney might ask her

employee to work additional hours, thus allowing the small office to increase the quantity

of hours supplied by 10 percent. And if the price continues to stay at the higher rate, she

might expand the office and employ a junior associate and thus increase the hours supplied

by 20 percent.

Long-term Es=20%/10% = 2

Because suppliers, once the price of the good has changed, usually cannot quickly

change the quantity supplied, economists predict that the price elasticity of supply increases

as time passes. Figure 7.6 illustrates the short-term (SSR) and long-term (SLR) supply curves

for our attorney. In general, the less steep the supply curve, the more elastic suppliers are in

response to a change in the price.

82 á Step 4. Review the Knowledge You Need to Score High

TIP • A cross-price elasticity of demand less than zero identifies complementary goods.

• A cross-price elasticity of demand greater than zero identifies substitute goods.

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