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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

o higher costs supply decreases
o lower costs supply increases
 new technology
o new technology supply increases
 changes in the of other potential output
o rise in the price of cupcakes more profitable to produce cupcakes devote more
resources to the production of cupcakes supply of doughnuts decreases
o 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
o more sellers supply increases
o fewer sellers supply decreases
 changes in expected future prices
o expect higher prices supply decreases now
o 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