1.2.5 - price elasticity of supply

define price elasticity of supply

measures the responsiveness of supply of a good to a change in price of the good

price elasticity of supply abbreviation

PES

PES formula

percentage change in supply/percentage change in price

PES relationship

positive (upwards sloping)

so the number will always be positive

elastic supply

cuts the price axis (PES > 1)

means that firms can increase supply quickly at little cost

perfectly elastic

horizontal graph (PES = +∞)

supply any quantity at one price, change price and supply nothing (infinitely responsive to price)

inelastic supply

cuts the quantity axis (PES < 1)

increase in supply will be expensive and take time

perfectly inelastic

vertical supply curve (PES = 0)

supply same quantity for every price (completely unresponsive to price)

unitary elasticity

supply curve intersects the origin (where the axes meet)

PES = 1

factors affecting PES

less elastic

• less time

• operating at full capacity

• low/perishable stocks

• unsubstitutable FOPs

more elastic

• more time

• spare capacity

• stockpiles available

• very substitutable FOPs

define the ‘short-run’

the period of time in which at least one FOP is fixed (cannot be changed)

limits a firm’s ability to fully adjust its production capacity

in the short run, supply is more inelastic

define the ‘long-run’

the period of time in which all factors of production are variable

in the long run, supply is more elastic