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Economics 14

Lecture 6: Supply and Demand, Part 3

things that shift the supply curve
elasticity

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Things that Shift the Supply Curve

• changes in the prices of inputs
  • higher costs supply decreases
  • lower costs supply increases
• new technology
  • new technology supply increases
• changes in the of other potential output
  • rise in the price of cupcakes more profitable to produce cupcakes devote more resources to the production of cupcakes supply of doughnuts decreases
  • fall in the price of cheese less profitable to produce cheese devote fewer resources to the production of cheese supply of ice cream increases
• changes in the number of producers
  • more sellers supply increases
  • fewer sellers supply decreases
• changes in expected future prices
  • expect higher prices supply decreases now
  • expect lower prices supply increases now

Elasticity

We want to measure the magnitude by which consumers change the quantity demanded in response to a change in the price of the product. The more elastic demand is, the more responsive it is to price changes.

                              percentage change in quantity demanded
price elasticity of demand = ----------------------------------------
                                  percentage change in price

the price elasticity of demand

• tells us the percentage change in quantity demanded resulting from a 1% change in price
• is always negative, so the negative sign is dropped

when the price elasticity of demand is

• greater than 1, demand is elastic: consumers respond a lot to a price change
• equal to 1, demand is unit elastic
• less than 1, demand is inelastic: consumers do not respond much to a change in price

David A. Latzko Business and Economics Division Pennsylvania State University, York Campus office: 13 Main Classroom Building phone: (717) 771-4115 fax: (717) 771-4062 e-mail: web: www.yk.psu.edu/~dxl31