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Chapter 6: Problem 2

What is the main determinant of the price elasticity of supply?

Short Answer

Expert verified
The main determinant of the price elasticity of supply is the 'Time period'. The longer the producer has to respond to price changes, the more elastic the supply becomes.

Step by step solution

01

Define the price elasticity of supply

The price elasticity of supply is a measure used in economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price. Mathematically, it can be represented as \(\frac{\% \Delta Qs}{\% \Delta P}\), where \(Qs\) is the quantity supplied and \(P\) is the price.
02

Understand the factors that determine price elasticity of supply

Several factors can influence the price elasticity of supply: (i) The availability of materials - if the resources used to produce a good are readily available, then the supply can respond quickly to price changes, (ii) The time period - it is easier to change the supply in the long run than in the short run, (iii) The ability to store goods - if goods can easily be stored, then suppliers can adjust their supply quickly in response to price changes.
03

Identify the main determinant

Given these factors, it is safe to say that the 'Time period' is the main determinant of the price elasticity of supply. The longer the time period considered for a supply decision, the greater the elasticity of supply, as suppliers have more time to respond to price changes. In the short-run, the elasticity of supply is likely to be less as production capacities are fixed.

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Most popular questions from this chapter

What is the midpoint formula for calculating price elasticity of demand? How else can you calculate the price elasticity of demand? What is the advantage of using the midpoint formula?

To legally operate a taxi in New York City, a driver must have a medallion issued by the New York City Taxi and Limousine Commission, an agency of the city's government. In 2017 the number of medallions was 13,587 . In recent years the taxi industry in New York and other large cities has encountered competition from companies such as Uber, an app-based service that offers rides from drivers who own their own cars. Uber varies the prices it charges based on the demand for rides, with rides during busier periods, such as Saturday nights, having higher prices. a. What does the limitation on their number imply about the price elasticity of supply of taxi medallions? b. Is the supply of Uber rides more or less elastic than the supply of taxi rides in New York City? Briefly explain.

Suppose that the following table gives data on the price of rye and the number of bushels of rye sold in 2017 and 2018 : $$ \begin{array}{c|c|c} \hline \text { Year } & \begin{array}{c} \text { Price (dollars per } \\ \text { bushel) } \end{array} & \text { Quantity (bushels) } \\ \hline 2017 & \$ 3 & 8 \text { million } \\ \hline 2018 & 2 & 12 \text { million } \\ \hline \end{array} $$ a. Calculate the change in the quantity of rye demanded divided by the change in the price of rye. Measure the quantity of rye in bushels. b. Calculate the change in the quantity of rye demanded divided by the change in the price of rye, but this time measure the quantity of rye in millions of bushels. Compare your answer to the one you computed in (a). c. Assuming that the demand curve for rye did not shift between 2017 and \(2018,\) use the information in the table to calculate the price elasticity of demand for rye. Use the midpoint formula in your calculation. Compare the value for the price elasticity of demand to the values you calculated in (a) and (b).

Amazon allows authors who self-publish their e-books to set the prices they charge. One author was quoted as saying, "I am able to drop prices and, by sheer volume of sales, increase my income." Was the demand for her books price elastic or price inelastic? Briefly explain.

One study found that the price elasticity of demand for soda is -0.78 , while the price elasticity of demand for Coca-Cola is \(-1.22 .\) Coca-Cola is a type of soda, so why isn't its price elasticity the same as the price elasticity for soda as a product?
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