Price elasticity of Supply 1-24-11Supply shifts out---price falls, quantity risesInelastic demand---price effect dominates-In August, motel room in Anaheim are more expensive than in January-Motels have less space compared to JanuaryThe Motel Supply Curve-Suppose capacity is 500 rooms“If price is below $50, no one rents a room but if a price is above $50, 500 rooms are sold out”According to our model, if the price was higher in January, then the demand curve would be lower.• How does a change in market fundamentals affect price and quantity?o Anything that affects the supply and demand, that isn’t priceo We measure this by drawing the first supply and demand curve, then the 2nd situationo Then we compare the equilibrium points EX: Beef and chicken comparisonAn increase in Beef price, means you might have chicken for dinner, so the increase price of one good affects another Complement like gasoline and motelsIncrease in price of gasoline, decreases summer travels and demand for motels (see curve on slide)Other Factors:• Consumer Income o For normal good, increase in income increases demando For inferior good, increase in income decreases demand• Population of consumers• TastesExamples-Ski lift tickets are more expensive on the weekend, and there are more skiers. Which curve moves, Supply or Demand? Demand.-Strawberries are more expensive and fewer are sold in January than July. What curve is different? Supply (graph online)-Good A has a lower price in time period 2 than in time period 1, and more of good A is sold in 2 than in 1, what curve is different between period 1 and 2? Supply-Good A has a lower price in time period 2 than in time period 1, and less of good A is sold in 2 than in 1, what curve is different between period 1 and 2? DemandPrice Elasticity of Supply= % change in quantity supplies/%change in price-Measured moving along supply curveo Price of supply is non-negativeo If Es>1, supply is price elasticPerfect Inelastic Example:-The price will be 0 until a certain quantity, where the price soars vertical on the graph (ex: land; because we have no more of it )Perfect Elastic Demand:Quantity supplied is zero until price reaches a certain point, where Es=
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