Elasticity of supply

0:00- [Lecturer] So let's talk a little bit about elasticity of supply. And the word elastic might make you think of a rubber band or a piece of spandex, something that stretches. And that's really what this concept is about. How much does supply stretch in response to changes in price?

0:18And so let's look at a tangible example, and then we'll analyze it in a bunch of different ways. We're told here that Daniela operates a handmade soap business. Recently, the price of her lavender soap increased from $4 per bar to $5 per bar. Seeing the potential for more profit, Daniela increased her production from 1000 bars per month to 1500 bars per month.

0:43So let's think about, let's analyze what the elasticity of supply of bars of soap are. And in other videos, we go into a lot more depth. This video, it's important for you to just get the intuition, although I find when you see the math, it oftentimes helps build an intuition.

0:58So we define elasticity of supply, we define it as percent change in quantity over percent. The Greek letter delta, this triangle, that's just shorthand for change, percent change in price. And in this situation, what is our percent change in quantity? And what is our percent change in price?

1:21Well, our percent change in quantity, if we go from 1,000 bars to 500 bars, we increase from 500 by 500 bars on a base of 1,000. So that's a +50% increase in quantity. And then what's our percent change in price? Well, if we go from $4 to $5, that's an increase of $1 off of a $4 base, so that's a 25% increase.

1:47And so this is equal to two. And so this number right over here, this is known as the coefficient of elasticity. In this case, we're calculating the coefficient of elasticity of supply, coefficient of elasticity. And in general, if you just see a coefficient of elasticity, it tells you whether we're dealing with something that is more elastic or less elastic.

2:09If this thing up here is greater than one, then we talk about it being elastic. And if it's less than one, we call it inelastic. And think about why that actually makes sense. If it's greater than one, just as we saw in this example here, that means that for a given percent change in price, you're going to get a larger than that percent change in quantity.

2:33The quantity is stretching more. On the other hand, if you had a coefficient that's less than one, that meant that whatever your percent change in price was, your percent change in quantity is less than that. So in this example, if Daniela increased her production from a 1,000 bars to 1100 bars, that would've only been a 10% increase in quantity on a 25% increase in price.

2:55And so that would've been an in elasticity of supply or in elastic supply. But the important thing to realize here is that this is measuring how much supply is responsive, I guess you could say, to changes in price. And we can quickly calculate that with the coefficient of elasticity of supply in this situation.

3:19If it's greater than one, that means quantity, supply is really responding to price. It's really stretching when price changes in a certain direction. And if it's less than one, that means it doesn't change that much, depending on how much, when price changes a certain percentage, it won't change as high of a percentage.