 Hello and welcome to this session in which we will discuss the price elasticity of supply. In the prior session we looked at the price elasticity of demand. So it will be helpful if you can view the prior session because the formula is basically the same except we are using with supply rather than demand but you have to understand the difference between supply and demand. So the price elasticity of supply measures the responsiveness of the quantity supplied relative to change in its price. So when we change the price how much with supply changes? What's the what's that measurement? So we're going to quantify the percentage change in quantity supplied relative to the price percentage change in price. Simply put change in quantity delta and quantity which is a percentage divided by the delta and price percentage but here we are dealing with supply not demand. Basically the formula for demand is the same except rather than here we are dealing with supply in the prior session using the same formula for demand. I'm going to go over the formula in details a little bit more. So a higher price elasticity of supply indicates a greater sensitivity of suppliers to prices and change. So if we have a higher greater sensitivity a higher sensitivity it means supplier can react quickly to prices. Lower elasticity suggests a less responsive response. Now we need to know why some suppliers can react quickly to prices and changes and others cannot. There are reasons for that. Technically it's business reasons, resource reasons, limitation reasons, input reasons. We'll look at those later but this is what we're going to be discussing. So next we're going to look at the formula we're going to look at a few examples and factors that will affect price elasticity. Let's go ahead and get started. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Myles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead start your free trial today. Starting with the formula, the formula is the same as price elasticity of demand. It's the percentage change in quantity supplied which is the change in quantity which is the percentage change in quantity divided by the percentage change in price and this is how we find the price elasticity. Now again if you don't know how to find the percentage change how do you find the change? You subtract the initial value or the old value from the final value or the new value you will take the change whatever you find in one divide the result by the initial value then you multiply by 100 to express it as a percentage so simply put if we told you the price of a product increase from 50 to 60 first you compute the dollar change the dollar change is 10 and you the change divided by the initial value of 10 and we say the change is 20%. Now bear in mind as I mentioned earlier it's not the same as going from 60 to 50 here the change is 10 but you're dividing by 60 and the percentage is 16.67% so just be careful be aware use a calculator. So let's take a look at an example that applies the formula and specifically I'm going to tell you we're going to find elasticity in this example less than one I already gave you the answer but we have to see how we compute it and more importantly what does it mean to us what does it mean to us suppose you're a farmer who grows apples currently you produce 1000 kilograms when the price is two dollars per kilogram this is this is the current production and the price is two dollars now there was a recent increase in demand you know why well the consumer taste for apple changed there was some report that apples is good for you so the price of apple is rises to three dollars per kilogram as a result you decided to increase your apple production now you produce 1200 kilograms of apple so let's compute the price elasticity of demand again how do we compute this the percentage change in quantity divided by the percentage change in price so let's do that the quantity the percentage changes the quantity went from 1200 kilogram to from 1000 to 1200 it's 200 divided by 1000 the initial value the quantity increased by 20 percent let's look at the price the price went from three dollars from two dollars to three dollars so the change is one divided by two well that's 50 percent times 100 equal to 50 percent now we can find the elasticity 20 percent divided by 50 percent so the change in quantity divided by the change in price again percentage we'll find out the price elasticity in this example point four point four is less than one what does that mean it means the elasticity is relatively inelastic it means the producers can't keep up with the prices the prices went up by by 50 percent the farmer was able to to increase their production by 20 percent this means a 50 percent increase in price led only to a 20 percent increase in quantity now let me ask you why why do you think that's the case i mean my parents we grow apples so i'm familiar with this industry why do you think that's the case do you think you could just grow more apples now it takes time it takes years to do that so farmers my face limitation and responding quickly to price changes to the factors like the growing season limited land availability you may not have enough land and if you have enough land maybe you don't have you have to put apple trees and it takes time or the time required to expand production let's take a look at an example where elasticity is equal to one which is seldom that's the case but for the sake of mathematically illustrating this it's a good idea suppose you own a factory that produce t-shirts currently you manufacture 10 000 t-shirts per month when the price is 10 so you're happy supplying 10 000 when the price is 10 however do to demand decline i don't know somebody else producing t-shirts people don't like t-shirts anymore for whatever reason the price the price drops to eight as a result you decided to do what reduce your production i'm not gonna produce at eight dollars i'm only gonna produce eight thousand so let's see what is the price elasticity in this example well if we find the percentage change in quantity supplied which is negative 20 percent two thousand divided by negative two thousand divided by ten thousand and the price is negative two divided by negative 10 is negative 20 again negative by negative equal positive so when you always when you compute the price elasticity it's going to be a positive but remember whether that's positive or negative we look at the absolute value which is one the the price elasticity is one okay what does that mean it means there's there's nothing it's the same in this example the price elasticity is one indicating unit elasticity the decrease in price by 20 percent lentor proportionate decrease in quantity by 20 percent so suppliers were able to adjust their production exactly the same as the price seldom that's the case in the real world but for the purpose of the mathematically computing it's a good idea let's look at an example where elasticity is greater than one what does that mean before we do the computation it means you can as the price goes up you can produce more you can produce more let's consider an example a company that produces hand-knit sweaters suppose the initial price is $50 and the company is producing 1000 of those sweaters per month again the sweaters the sweaters are popular there was an increase in demand and as a result the company decided to increase the price to 70 because there's an increase in demand well as a result you have to increase your production you have to expand your production now we can produce 1500 sweaters per month let's compute the price elasticity for this company well the change in supplied $500 the 500 units divided by 1000 50 percent increase in quantity supplied the price is the difference is $20 divided by the initial price is $40 if we compute the price elasticity it's 1.5 1.5 is greater than one greater than one what does that mean it means the quantity supplies is relatively responsive to changes in price it indicate elasticity of supply the quantity supplied is relatively responsive so as soon as the price went up by 40 percent we jacked up our production by 50 percent now why can we do that why can we do that why can we do that well it could be that we were able to hire more knitters increase knitting hours or people working with us increase their hours or source additional knitting material to ramp up production so in order to do that you have to have the resources you cannot have any limitation because you need to increase this because a 40 percent increase in price you increase quantity supplied and 50 50 percent it's an elastic supply let's take a look at summary but basically just to make sure if it's a greater than one it means the supply is elastic it means that the quantity supplied is more responsive to change in price in other words a small percentage in price lead to a proportionally larger percentage in the quantity supplied less than one in elastic supply the quantity supplied is relatively less responsive to changes in price in other words a given percentage change in price leads to a proportionally smaller percentage in quantity supplied now what factors what factors influence the price elasticity what one factor is the availability of inputs if you don't have inputs if you don't have enough knitters then you cannot ramp up the production of the sweaters so if the input required are readily available suppliers can respond more quickly to a change in price resulting in higher elasticity of supply on the other hand if the input wherever you are producing if you don't have the raw material are limited or specialized it may be difficult for suppliers to adjust production level leading to lower elasticity now even if you have lower elasticity in the real world what you hope to do is to if you cannot produce hopefully the price is increased enough to offset that shortage for you shortage in profit because you want to produce more you can't hopefully the increase in price will make the difference suppose there are two companies a and b both producing wood and furniture right here company a has easy access to a variety of high quality wood suppliers while company b relies on a single specialized supplier for their woods so company a is more diversified they have more resources company b not as much let's assume there's an increase in demand for wood and furniture leading to a rise in market price as a result both companies fade the decision whether to increase their production or not of course you want to increase your production what's the difference here company a it has wide range of suppliers that can easily switch between supplier or negotiated a better deal to obtain more wood and therefore expand production and sell more wood and furniture not for company b not for company b so availability of inputs will influence the price elasticity of supply another example that will that will not not not example another factor that influence the price elasticity of supply is time horizon how much time you have okay the time horizon refers to the length of time given for suppliers to adjust their production in general the price elasticity of supply tend to be higher and the long term compare to the short run of course always in the long run companies can adjust find new raw material find new suppliers but what matters is in the short run you want to how long how much time do you have for instance if a price of oil increases it may take some time for oil producer to explore and develop new oil fields or invest in alternative energy sources because you cannot just produce more oils like that in the short run the supply of oil may be relatively inelastic but over the long run they can find new land they can build they can extract that oil new sources are discovered and alternative technology are developed and the elasticity of supply increases so although in other words initially in the short run you might have in elasticity but suppliers always find ways to increase their production if we go back to covid same thing with covid uh companies that were not producing enough enough wipes alcoholic wipes well you give them enough time they will do it or not enough oxygen tanks well you give them enough time they will increase their production in fact all and other factors that influence the price elasticity of supply is production capacity in a sense they are related production capacity input just tell you this in different perspective if the supplier have access or underutilized capacity they can respond more quickly and more readily to changes in price so if you have access capacity and there is more demand that demand is always that demand can be met easily because you have access the best example is consider an airline that operate flight with empty seats or not full they don't have you know full full trips empty seats what's what happened if the demand for air travel increase the airline can accommodate more passenger by utilizing its spare capacity in this case the price elasticity of supply will be higher due to availability of unused production capacity but if all the seats were taking and there was an increase then you cannot take advantage of that all what you can do is you can increase your prices and hopefully increase prices will offset some of that also production time and complexity how can how complex is what you are producing the time required to produce and the complexity of production if you need to change your production and your processes are complex then you're not elastic because you need more time if the production process is time consuming or interact if the production process is time consuming or intricate suppliers may find limitation in adjusting production levels quickly because it gets more complicated for example if you are if you have handcrafted luxury goods that required skill artisans well guess what you mean have a lower elasticity of supply compared to a company that's mass producing item because it's more difficult for you to expand your production why because it's considered more complex you need to require more time and special skills also barriers to entry could influence the price elasticity of supply the presence of barriers what could be a barrier of entry well high capital requirements for example if you want to produce cars okay if you want to start a car manufacturing company well you're gonna you're gonna need billions and billions of dollars well if you want to start a consulting company the barriers of entry is much more a much more much much more easier or you want to start an accounting firm you could have regulatory restriction for example if you want to start a pharmaceutical company you have to go through the FDA or you might need patents certain patent that could impact the price elasticity of supply when the barriers up to entry are high the number of supply number of suppliers may be limited resulting in lower elasticity of supply for example for talking about pharmaceutical industries faces strict regulation and lengthy approval process for new drugs well you cannot just say well another company can produce it it's not that easy this would restrict the number of suppliers and in the response of this supply to changes in price even if the prices go up for a certain drug but because it's in high demand you cannot create overnight a pharmaceutical company that can research the drug produce it get the FDA approval first of all it's expensive to its time consuming therefore if there's a barrier barriers of entry it could impact negatively the elasticity of supply what should you do now go to farhat lectures and work mcqs that's gonna cover this topic elasticity of supply price elasticity of demand those are important topics on the cpa exam important and easy topics where you can pick up what answers 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