ELASTICITY

OF SUPPLY
MGT 232

Lesson No 12
12 September 2023
RECALL : Price Elasticity of Demand

• Price elasticity of supply has the

same concept as price elasticity of
demand.
• The only difference is that price
elasticity of supply is applied in the
perspective of suppliers, sellers, or
producers.
Price Elasticity of Supply
• Measures sellers’ responsiveness
to price changes
• Elastic supply, producers are
responsive
‫طراحی گرافیک‬ to price changes

• Inelastic supply, producers are not

as responsive to price changes
Price Elasticity of Supply Formula
• Formula for price elasticity of supply
percentage change in quantity
supplied of product X
Es =
percentage change in price
of product X
 Price Elasticity of Supply
• Use the midpoint formula
• Ensures consistent results
Q 2 – Q1
( (Q2 + Q1) / 2)
Es = -------------------------

P2 – P 1
(( P2 + P1) / 2)
 Price Elasticity of Supply

•Es > 1 supply is elastic

•Es = 1 supply is unit elastic
•Es < 1 supply is inelastic
•Additionally,
• Es = 0 supply is perfectly inelastic
• Es = ∞ supply is perfectly elastic
LO4
BUDGET LINE

SOURCE : ECONOMICS Principles, Problems, and Policies by McConnel, Brue and Flynn.
Lesson Objectives : ATEOTL, ECSBAT

1 define a budget constraint line

2 explain shifts in a budget constraint line

 FACTORS INFLUENCING
CONSUMER BEHAVIOR
There are three most influential factors in
consumer behavior (“ceteris paribus”)
• Budget Constraint: Combinations of
goods that a fixed income can buy.
• Utility: Satisfaction derived from
consuming a good or a service
• Prices of Goods: Cost of the goods or
the services for the consumers to be
able to buy them.
9
The Budget
Constraint
10
 Budget Constraint
Possible Budget Choices of a Person
Earning 1,000 Php per day

Daily Other
Option Rent Food Expenses Total Available?
A P 400 P250 P350 P1,000 Yes
B 600 200 200 1,000 Yes
C 700 150 150 1,000 Yes

D 1,000 100 100 1,200 No

11
 Budget Constraint
• Is the limitation imposed by a fixed
budget (or income) to the number of
units of goods that a consumer can
buy.
• Represented as the budget line

12
Budget Constraint
Assumptions:
• budget is fixed given a certain
period of time
• only two goods are considered
(2-dimensional)
• prices of the 2 goods are fixed
given a certain period of time
• “ceteris paribus”- all other
things held constant
Budget Constraint
Preferences, Tastes, Trade-Offs, and
Opportunity Cost

• Within the constraints imposed by

limited income and fixed prices,
households are free to choose
what they will and will not buy.
 Budget Constraint
Preferences, Tastes, Trade-Offs,
and Opportunity Cost

• Whenever a household makes a choice,

it is weighing the good or service that it
chooses against all the other things that
the same money could buy.
 Budget Constraint
Preferences, Tastes, Trade-Offs, and
Opportunity Cost
• As long as a household faces a limited
budget—and all households ultimately
do—the real cost of any good or service
is the value of the other goods and
services that could have been
purchased with the same amount of
money.
 Budget Constraint
• Graphically this is illustrated through the
budget line.
• The budget line is only a model designed
to illustrate the constraint posed by the
limited income on the consumer.
 The Budget Line
• Combinations of two products a consumer
can purchase with their money income

Slope
• Ratio of the price of B to the price of A
Location varies with income changes
Location varies with price changes

LO6
Budget Line
A budget line separates
those combinations of
goods and services that
are available, given
limited income, from
those that are not.
The available
combinations make up
the opportunity set.
 Budget Line
• The budget line is a I can use all my
Q of
downward sloping line Good budget by buying
Y 1 of good X and
which indicates various 18 of Good Y , or
combinations (in 18 3 of Good X and
10 of Good Y, or 4
quantities) of two goods of Good X and 6
that a consumer can buy, of Good Y.
10
given fixed income and
prices of goods. 6

1 3 4 Q of Good X
 Sample problem
What will be the budget line of Cadet
Naruto if he has 500 php to spend on 2
alternative goods, namely, an apple and
a pen with prices of 10 Php and 5 php
respectively?
STEP ONE: define the budget line equation

• Determine the following:

– The budget – sometimes called the income
– Price of Good X
– Price of Good Y

• Substitute values into the budget line

equation:
Budget = PxQx +PyQy
Budget Line Equation

Where: Px = price of good X

Py = price of good Y
Qx= quantity of good X
Qy= quantity of good Y

Let X= apple The assignment of terms is

Let Y = pen arbitrary, just be consistent.

Budget = PxQx +PyQy

Answer: 500 = 10Qx+ 5Qy
STEP 2: Find the X and Y Intercepts
• X intercept: Assume that cadet Naruto
will buy apple alone with his budget, how
many will he be able to buy? _____
500 = 10(Qx-# of apples) + 5 (0)
500 = 10Qx
10 10

50 = Qx
• Y- intercept: Assume that cadet Naruto will buy pen
alone with his budget, how many will he be able to
buy?_____

500 = 10(0)+ 5 (Qy- # of pen)

500 = 5 Qy
5 5

100 = Qy
Step 3 – 5: Plot, Label, & Check
• Step 3 : plot the x and y intercepts then
draw a straight line to connect the 2 points.
The resulting line is the budget line (Make
sure that you have assigned the 2 goods
on the correct axis)
• Step 4: Label the graph properly – graphs
that have no labels on it are meaningless.
• Step 5 : Check the points along the line if
the combinations of the two goods
maximizes the budget.
 100
No. 90
of
pen 80 30 apples and 40 pens
70 500 = 10(30) + 5(40)
500= 500
60

50 40 apples and 20 pens

500 = 10(40) + 5(20 )
40
500 = 500
30

20

10
No. of
0
10 20 30 40 50 60 70 80 90 100 apple
AFFORDABLE VS UNAFFORDABLE
COMBINATIONS
BUDGET MAXIMIZING COMBINATIONS
Combinations that
fall exactly along
Y
the budget line
maximizes the •
budget, thereby
maximizing •
satisfaction
(ceteris paribus)
X
CHANGES IN THE BUDGET
Budget line (BL) shifts to Good
Y
the right if the income
increases (prices remain
constant)- able to buy
more of both goods
BL shifts to the left if
income decreases – less
able to buy both goods

Good
X
 Budget Constraints Change
When
BL rotates inwardPrices Rise or Fall
when price of one
good increases while
price of the other
good remains
constant
BL rotates outward
when price of one
good decreases while
price of the other
good remains
constant
Changes in the Budget Constraint
Y Y

X X

Y Y

X X
 Administrative
Announcement
Review the topic
on Budget Line for
a graded activity
next meeting

33
09/19/2023