Elasticity of Supply

… a core concept in Economic Analysis and Atlas102

Click for MRU video

Click for MRU video

Concept description

The elasticity of supply is a measure of how responsive the quantity supplied is to a change in price:

Elasticity of supply = the percentage change in quantity supplied divided by the percentage change in price

If the absolute value of the elasticity of supply is <1,  the supply curve is inelastic; if it is >1 the supply curve is inelastic; if it is =1, the supply curve is unit elastic.

Alex Tabarrok elaborates in his MRU video (link above right, reference below). He notes that, although elasticity is not exactly the same a the slope of the line, they are related and presents the following simple rule: If two linear supply curves run through a common point, then at any given quantity, the curve that is flatter is more elastic.

ElasticityOfSupply

Determinants of the elasticity of supply

Tabarrok lists the following determinants:

  1. Change in per-unit costs with increased production (the fundamental determinant)
    1. If increased production requires much higher costs, then the supply curve will be inelastic
    2. If production can increased with constant costs then the supply curve will be elastic
  2. Time horizon
    1. Immediately following a price increase, producers can expand output only using their current capacity, making supply inelastic
    2. Over time, however, producers can expand their capacity, making supply elastic
  3. Share of the market for inputs
    1. Supply is elastic when the industry is a small demander in its input markets because supply can be expanded without causing a big increase in the demand for the industry’s inputs
    2. Supply is inelastic when the industry is a big demander in its input markets
  4. Geographic scope
    1. The narrower the scope of the market of a good, the more elastic its supply
    2. The wider the scope of the market of a good, the less elastic its supply

This can be summarized in the following table:

Less elastic

More elastic

Difficult to increase production at constant unit cost Easy to increase production at constant unit cost
Short run (less time) Long run (more time)
Large share of market for inputs Small share of market for inputs
Global supply Local supply
Elasticity and the slave redemption program in Sudan
Click for MRU video

Click for MRU video

Tyler Cowen (reference below, video on right) uses these principles to analyze the effectiveness of the 1990s humanitarian initiative to buy the freedom of slaves in Sudan. As indicated in the diagram to the right, the evidence from the change in the market redemption price over time suggests that the longer term supply curve (flatter blue line) is rather elastic and that the humanitarian program was actually leading to the enslavement of more people, at least until their freedom was purchased through the program.

The program is analyzed in more detail in the first 8 minutes of a second Tabarrok video (reference below; diagram and video directly below. Tabarrok calculates that the program may have led to a net of 400 slaves freed, but at the cost of the at least temporary enslavement of 1,200 people.

Click for MRU video

Click for MRU video, minutes 0:00 to 8:00

Gun buyback programs

Tabarrok is even more definitive about the futility of municipal guy buyback programs, given the highly elastic supply of guns in a local market, as seen on the diagram below.

Click for MRU video, minute 8:00 to end

Click for MRU video, minute 8:00 to end

Practice questions

See http://www.mruniversity.com/node/186778, http://www.mruniversity.com/node/186779, and http://www.mruniversity.com/node/186780, accessed 28 April 2016.

  1. Which of the two goods is more likely to be elastically supplied?
  2. For which of the following products would you expect the largest increase in price for the same increase in demand?
  3. Suppose that drug addicts pay for their addiction by stealing: So the higher the total revenue of the illegal drug industry, the higher the amount of theft. If a government crackdown on drug suppliers leads to a higher price of drugs, what will happen to the amount of stealing if the demand for drugs is elastic?

Source

Alex Tabarrok, Elasticity of Supply, Marginal Revolution University, 14-minute video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/elasticity-supply-midpoint-formula, accessed 28 April 2016.

Tyler Cowen, Elasticity and Slave Redemption, 5-minute video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/elasticity-example-slave-redemption-sudan, accessed 28 April 2016.

Alex Tabarrok, Applications Using Elasticity, Marginal Revolution University, 16-minute video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/elasticity-examples-applications, accessed 28 April 2016.

Atlas topic and subject

Consumer Theory and Elasticity of Demand and Supply (core topic) in Economic Analysis.

Page created by: Ian Clark, last modified on 28 April 2016.

Image: Minute 0.50 of MRU Video,at http://www.mruniversity.com/courses/principles-economics-microeconomics/elasticity-supply-midpoint-formula, accessed 28 April 2016.