2.« ewliy $4. pfod-KCfs Mir *upp»> err/ quanw,.


In some markets, the elasticity of supply is not constant but varies over the supply curve. Figure 6 shows a typical case for an industry in which firms have factories with a limited capacity tor production. For low levels of quantity supplied, the elasticity of supply is high, indicating that firms respond substantially to changes in the price, In this region, firms have capacity for production that is not being used, such as plants and equipment idle for all or pari of the day. Small increases in price make it profitable for firms to begin using this idle rapacity. As the quantity supplied rises, firms begin to reach capacity. Once capacity is fully used, increasing production further requires the construction of new plants. To induce firms lo incur Ihis extra expense, the price must rise substantially, so supply beo>ir>es less elastic.

Figure 6 presents a numerical example of this phenomenon. When the price rises from 53 lo $4 (a 29 percent increase, according lo the midpoint method), the quantity supplied rises from 100 to 2IX) (a 67 percent increase). Because quantity supplied changes proportionately more than the price, the supply curve has elasticity greater than 1. By contrast, when the price rises from SI 2 to $15 (a 22 percent increase), the quantity supplied rises from 500 to 525 (a 5 percent increase). In Ihis case, quantity supplied moves proportionately less than the price, so the elasticity is less than 1.

QUICK QUIZ Define the price elasticity of supply. • Explain why the price elasticity of supply might be different in the long run and in the short run.

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