2.6 PES (please evade stop)

What is the Law of Supply?

States that as price increases (ceteris paribus), producers increase quantity supplied, and vice versa.

What does Price Elasticity of Supply (PES) measure?

It measures how responsive the quantity supplied is to a change in price.

How is PES calculated?

change in supply/ change in price

What formula calculates a percentage change?

\text{% Change} = \frac{\text{New Value} - \text{Old Value}}{\text{Old Value}} \times 100

Worked Example: Avocados - Calculate % Change in Quantity Supplied (QS up from 110 to 120 units)

\text{% Change in QS} = \frac{120-110}{110} \times 100 \approx 9.09\%

Worked Example: Avocados - Calculate % Change in Price (Price up from AU$0.90 to AU$1.45)

\text{% Change in P} = \frac{1.45-0.90}{0.90} \times 100 \approx 61.11\%

Worked Example: Avocados - Calculate PES using calculated % changes (QS 9.09%, P 61.11%)

\text{PES} = \frac{9.09\%}{61.11\%} \approx 0.15

Worked Example: Interpret the PES value for avocados (0.15).

A PES of 0.15 indicates very price inelastic supply. Suppliers struggle to increase output significantly with a price rise, likely due to long growth times.

What does a PES value of 0 indicate?

Perfectly Inelastic Supply; Quantity Supplied (QS) is completely unresponsive to price changes (e.g., fixed theatre seats).

What does a PES value between 0 and 1 signify?

Relatively Inelastic Supply; % change in QS is less than proportional to % change in price (e.g., agricultural products).

What does a PES value of 1 mean?

Unitary Elastic Supply; % change in QS equals % change in price.

What does a PES value greater than 1 indicate?

Relatively Elastic Supply; % change in QS is more than proportional to % change in price (e.g., t-shirts).

What does a PES value of infinity (\infty) represent?

Perfectly Elastic Supply; QS falls to zero with any price change, or supply is unlimited at a specific price (theoretical).

Identify the five main determinants of Price Elasticity of Supply (PES).

1. Mobility of factors of production.

2. Rate of marginal cost increase.

3. Ability to store goods.

4. Spare capacity.

5. Time period.

How does the mobility of factors of production influence PES?

High factor mobility (resources easily switched) makes supply more elastic. Low mobility makes supply more inelastic.

How does the rate of marginal cost increase affect PES?

Slow marginal cost increases lead to more elastic supply. Rapid marginal cost increases lead to more inelastic supply.

How does the ability to store goods impact PES?

Easily storable goods allow quicker supply increases (higher PES). Perishable/difficult-to-store goods lead to lower PES.

How does spare capacity influence PES?

More spare capacity makes supply elastic. No spare capacity makes supply inelastic.

How does the time period affect PES?

Short run: more inelastic (limited adjustment). Long run: more elastic (all factors adjustable).

Generally, how does the PES of primary commodities compare to manufactured products?

Primary commodities tend to have a lower (more inelastic) PES than manufactured products.

Explain the difference in factor mobility affecting PES for primary commodities vs. manufactured goods.

Primary (inelastic): Difficult for farmers to quickly switch crops. Manufactured (elastic): More flexibility to switch production between goods (e.g., car models).

Explain how marginal cost increases affect PES for primary commodities vs. manufactured goods.

Primary (lower PES): High marginal costs for additional units due to production constraints. Manufactured (higher PES): Lower additional costs for mass-produced items.

Explain how the ability to store goods affects PES for primary commodities vs. manufactured goods.

Primary (lower PES): Perishable nature limits storage, reducing short-term responsiveness. Manufactured (higher PES): Can be stored longer, allowing supply adjustments from existing stock.

Explain how spare capacity affects PES for primary commodities vs. manufactured goods.

Primary (lower PES): Output is often labor/land intensive, limiting spare capacity. Manufactured (higher PES): Often machine-generated, allowing more spare production capacity.

Explain how the time period affects PES for primary commodities vs. manufactured goods.

Primary (lower PES): Longer time period required to grow or extract (e.g., planting and harvesting cycles). Manufactured (higher PES): Many products can be manufactured in a relatively short time.