Our examples tell us the main determinant of the price elasticity of supply: the availability of inputs. In addition, as with the price elasticity of demand, time may also play a role in the price elasticity of supply. Here we briefly summarize the two factors.
The Availability of Inputs The price elasticity of supply tends to be large when inputs are readily available and can be shifted into and out of production at a relatively low cost. It tends to be small when inputs are difficult to obtain—
Time The price elasticity of supply tends to grow larger as producers have more time to respond to a price change. This means that the long-
The price elasticity of the supply of pizza is very high because the inputs needed to expand the industry are readily available. The price elasticity of cell phone frequencies is zero because an essential input—
Many industries are like pizza production and have large price elasticities of supply: they can be readily expanded because they don’t require any special or unique resources. In contrast, the price elasticity of supply is usually substantially less than perfectly elastic for goods that involve limited natural resources: minerals like gold or copper, agricultural products like coffee that flourish only on certain types of land, and renewable resources like ocean fish that can only be exploited up to a point without destroying the resource.
But given enough time, producers are often able to significantly change the amount they produce in response to a price change, even when production involves a limited natural resource or a very costly input. Agricultural markets provide a good example. When American farmers receive much higher prices for a given commodity, like wheat (because of a drought in a big wheat-
For this reason, economists often make a distinction between the short-
European Farm Surpluses
One of the policies we analyzed in Chapter 5 was the imposition of a price floor, a lower limit below which price of a good could not fall. We saw that price floors are often used by governments to support the incomes of farmers but create large unwanted surpluses of farm products. The most dramatic example of this is found in the European Union, where price floors have created a “butter mountain,” a “wine lake,” and so on.
Were European politicians unaware that their price floors would create huge surpluses? They probably knew that surpluses would arise but underestimated the price elasticity of agricultural supply. In fact, when the agricultural price supports were put in place, many analysts thought they were unlikely to lead to big increases in production. After all, European countries are densely populated and there is little new land available for cultivation.
What the analysts failed to realize, however, was how much farm production could expand by adding other resources, especially fertilizer and pesticides, which were readily available. So although European farm acreage didn’t increase much in response to the imposition of price floors, European farm production did!
The price elasticity of supply is the percent change in the quantity supplied divided by the percent change in the price.
Under perfectly inelastic supply, the quantity supplied is completely unresponsive to price and the supply curve is a vertical line. Under perfectly elastic supply, the supply curve is horizontal at some specific price. If the price falls below that level, the quantity supplied is zero. If the price rises above that level, the quantity supplied is extremely large.
The price elasticity of supply depends on the availability of inputs, the ease of shifting inputs into and out of alternative uses, and the period of time that has elapsed since the price change.
Using the midpoint method, calculate the price elasticity of supply for web-
True or false? If the demand for milk rose, then, in the long run, milk-
True or false? Long-
True or false? When supply is perfectly elastic, changes in demand have no effect on price.
Solutions appear at back of book.