#Price Elasticity of Supply: Your Ultimate Guide 🚀

Hey there, future AP Micro ace! Let's dive into Price Elasticity of Supply (PES), a concept that's super important for your exam. Think of it as the supply side's version of price elasticity of demand. Ready? Let’s go!

#What is Price Elasticity of Supply (PES)?

Just like how consumers react to price changes (that's price elasticity of demand), producers also adjust their output when prices shift. PES measures how sensitive the quantity supplied is to changes in price.

Key Concept

It's all about how much a producer changes their output when prices change.

High PES: Producers respond a lot to price changes (supply is elastic).
Low PES: Producers don't change their output much when prices change (supply is inelastic).

Let's illustrate with an example:

Imagine two headphone companies:

Firm A: Price goes from $50 to$ 75, and production increases from 10 to 12 headphones.
Firm B: Price goes from $50 to$ 75, and production increases from 10 to 20 headphones.

Firm B is more price elastic because it's more responsive to price changes. 🎧

#Calculating Price Elasticity of Supply

The formula is very similar to the price elasticity of demand formula:

$E_s = \frac{%\Delta Q_s}{%\Delta P}$

Where:

$E_s$ = Price elasticity of supply coefficient
%Δ = Percent change
$Q_s$ = Quantity supplied
$P$ = Price

Let's calculate Firm B's PES from the example above:

$Q_{s1} = 10$
$Q_{s2} = 20$
$%\Delta Q_s = \frac{20 - 10}{10} \times 100 = 100%$
$P_1 = 50$
$P_2 = 75$
$%\Delta P = \frac{75 - 50}{50} \times 100 = 50%$

Therefore:

$E_s = \frac{100}{50} = 2$

This means a 50% price increase leads to a 100% increase in quantity supplied. That's a pretty elastic supply! 💡

#Types of Elasticity of Supply

Here's a breakdown of the different types of supply elasticity:

#Perfectly Inelastic Supply

$E_s = 0$
Quantity supplied doesn't change, no matter the price. Think of a company with a monopoly on a unique product. They'll supply the same amount regardless of price. 🧱

#Relatively Inelastic Supply

$0 < E_s < 1$
Quantity supplied changes a little with price changes. This is common for companies with high fixed costs (like a factory). They can't quickly ramp up production. 🏭

#Unit Elastic Supply

$E_s = 1$
Percentage change in quantity supplied is equal to the percentage change in price. It's a proportional response. ⚖️

#Relatively Elastic Supply

$E_s > 1$
Quantity supplied changes a lot with price changes. This is common for companies that can quickly increase production with low costs and high demand. 🚀

#Perfectly Elastic Supply

$E_s = \infty$
Quantity supplied becomes infinite with even a tiny price increase. Think of a commodity like wheat, where there are many suppliers. 🌾

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Memory Aid

Mnemonic for remembering elasticity ranges:

Perfectly Inelastic: Think of a brick wall - supply doesn't budge! (Es = 0)
Relatively Inelastic: Like a slow-moving train - supply changes a little. (0 < Es < 1)
Unit Elastic: A perfectly balanced scale - supply changes proportionally. (Es = 1)
Relatively Elastic: Like a spring - supply stretches a lot. (Es > 1)
Perfectly Elastic: Imagine an endless supply - supply is infinite! (Es = ∞)

Exam Tip

Remember, the key difference between price elasticity of demand and supply is that demand is usually negative (due to the inverse relationship between price and quantity demanded), while supply is usually positive (due to the positive relationship between price and quantity supplied).

#Final Exam Focus

High-Value Topics:
- Calculating PES using the formula.
- Understanding the different types of supply elasticity and their real-world examples.
- How PES affects market outcomes (especially in combination with price elasticity of demand).
Common Question Types:
- Multiple-choice questions testing your understanding of the definitions and ranges of PES.
- FRQs requiring you to calculate PES, interpret its value, and explain its implications.
- Questions that combine PES with other concepts like market equilibrium and government interventions.
Last-Minute Tips:
- Review the formulas for both price elasticity of demand and supply.
- Practice drawing and interpreting supply curves with different elasticities.
- Focus on understanding the underlying concepts rather than just memorizing facts.

Common Mistake

Don't confuse price elasticity of supply with price elasticity of demand. Supply is about producers, demand is about consumers. Also, remember that PES is usually a positive number, while PED is usually negative.

#Practice Questions

Practice Question

Multiple Choice Questions

If the price of a good increases by 10% and the quantity supplied increases by 5%, the price elasticity of supply is: (A) 0.5 (B) 2 (C) 50 (D) 10 (E) 0
Which of the following best describes a good with a perfectly inelastic supply? (A) A good for which quantity supplied changes greatly with a change in price. (B) A good for which quantity supplied does not change when the price changes. (C) A good for which the percentage change in quantity supplied is equal to the percentage change in price. (D) A good for which the percentage change in quantity supplied is greater than the percentage change in price. (E) A good for which the percentage change in quantity supplied is less than the percentage change in price.
A firm's supply curve is vertical. This indicates that the firm's supply is: (A) Perfectly elastic. (B) Relatively elastic. (C) Unit elastic. (D) Relatively inelastic. (E) Perfectly inelastic.

Free Response Question

Assume that the market for coffee is perfectly competitive. The current market price of coffee is $8 per pound, and 100 million pounds are traded daily. Suppose that a new technology makes coffee production more efficient, leading to a 20% increase in the quantity of coffee supplied at every price. The price elasticity of demand for coffee is 0.5. (a) Calculate the percentage change in the equilibrium price of coffee.$

(b) Calculate the new equilibrium quantity of coffee.

(d) Explain the impact of the new technology on consumer surplus.

Answer Key and Scoring Rubric

Multiple Choice Answers:

(A) 0.5
(B) A good for which quantity supplied does not change when the price changes.
(E) Perfectly inelastic.

Free Response Scoring:

(a) Calculate the percentage change in the equilibrium price of coffee (3 points)

1 point: Correctly state the formula for the price elasticity of demand:E_d = \frac{%\Delta Q_d}{%\Delta P}$
1 point: Correctly calculate the percentage change in quantity demanded: 20% (since the supply increases by 20% and the market reaches a new equilibrium)
1 point: Correctly calculate the percentage change in price using the elasticity of demand: -40% (since 0.5 = 20%/x, x = 40%)

(b) Calculate the new equilibrium quantity of coffee (2 points)

1 point: Calculate the change in quantity due to the shift in supply: 20% increase in quantity supplied at every price.
1 point: Calculate the new equilibrium quantity: 100 million * 1.20 = 120 million pounds

(c) Draw a correctly labeled graph showing the initial and new market equilibrium for coffee (4 points)

1 point: Correctly label the axes (Price on the vertical axis and Quantity on the horizontal axis).
1 point: Draw the initial supply and demand curves, and show the initial equilibrium point.
1 point: Draw the new supply curve shifted to the right.
1 point: Indicate the new equilibrium point with the lower price and higher quantity.

(d) Explain the impact of the new technology on consumer surplus (1 point)

1 point: Explain that the new technology increases consumer surplus because the equilibrium price decreases, and the equilibrium quantity increases.

You've got this! Remember, understanding the core concepts and practicing with examples will help you ace the AP Microeconomics exam. Keep up the great work, and good luck! 🍀