Question

Why is supply more​ price-elastic in the long​ run?

The milk industry provides a good example of the difference between the​ short-run and​ long-run price elasticity of supply. The price elasticity of supply over a​ one-year period is about​ 0.10: If the price of milk increases by 20 percent and stays there for a​ year, the quantity of milk supplied will rise by only 2 percent. In the short​ run, dairy farmers can squeeze just a little more output from their existing production facilities. In the long​ run, dairy farmers can expand existing facilities and build new​ ones, so farmers are more responsive to a higher​ price-the supply curve is flatter and the supply elasticity is larger. The price elasticity of supply is​ 2.5, so the same 20 percent rise in price increases the quantity supplied by 50 percent.

Answer 1