Price Elasticity of Supply

What is PES?

Measures the responsiveness of quantity supplied to a change in price for G/S.

How do you know when its elastic or inelastic?

Elastic if % change in Qs > % change in price

Inelastic if % change in Qs < % change in price

In the short run, sometimes its impossible for firms to increase their supply straight away → until new FOPs are employed. Example + diagram?

61,00 seats - you can’t add seats straight away

What are the determinants of PES?

How much costs rise as output is increased. If total costs rise significantly as a producer attempts to increase supply, its likely producer will not raise supply. If it doesn’t rise costs too much, then producer will take chance

What factors assist in preventing significant costs?

• If a firm has a lot of unused capacity → easy to increase output easily

• Mobility of factors of production → if FOPs are easily moved from one productive use to another, then PES is pretty elastic

• Time period considered

• If they cannot increase number of FOPs they employ, the value of PES will be very inelastic in the short run, as they may not be able to increase machines, but this can happen in the future, making PES more elastic