3.1.2.4 PRICE ELASTICITY OF SUPPLY

Define price elasticity of supply

How responsive the quantity supplied of a good is to a change in its price

What is the PES calculation?

% change in quantity supplied / % change in price

When is PES elastic and inelastic?

PES > 1 - supply is elastic

PES < 1 - supply is inelastic

PES = 1 - supply is unit elastic

So if it’s 40/25

Is this elastic or inelastic?

Elastic

So if it’s 25/40

Is this elastic or inelastic?

Inelastic

What is an example of a product/industry that could not easily respond and increase supply overnight? (inelastic)?

Farmers - growing crops

What is an example of a business/industry that would be able to respond and increase supply overnight?(elastic)?

Car manufacturing - could speed up machinery and automation

Is the supply curve intersects the price axis, what does this mean?

The curve is elastic at all points

If the supply curve intersects the quantity axis, what does thismean?

The curve is inelastic at all parts

If the supply curve passes through the origin, what does this mean?

Elasticity equals unity (+1) at all points on the curve

What does each curve look like?

• price elastic, perfectly elastic, unit elastic, inelastic and completely inelastic?

What are some factors that determine price elasticity of supply?

• length of production period

• the availability of spare capacity

• the ease of accumulating stocks

• the ease of switching between attentive methods of production

• the number of firms in the market and the ease of entering that market

• time (short run vs long run)

What do you want each of these factors to be to be elastic?

• short length of production period

• lots of spare capacity

• ease at accumulating stocks

• high number of firms in the market

• short run - time

What would the opposite of all these factors be?

More inelastic

Do all these factors mean that the elasticity of supply, becomes more what?

Relatively elastic

If the question was about “supplying millions of doses of the new COVID vaccine”

Would this be inelastic, elastic or both?

In the short run - inelastic - supply cannot rapidly increase

In the long run - more elastic - the formula would already be about there and people would be able to supply more

Why would “the supply of a new housing estate” be inelastic?

As planning takes a long time - supply cannot respond quickly

Why are hospital and nurses inelastic?

Supply cannot adjust quickly in the short run

This is why there is not enough beds - people are being treated in the corridors

Explain the impact on the price elasticity of supply using these examples: (in brief)

1 - supplying millions of doses of the new COVID vaccine

2 - limited capacity of the NHS to meeting patient needs

3 - the supply of new housing required for those wanting to buy and rent

4 - supply of sources of renewable energy such as wind and solar

5 - elasticity of supply of primary commodities in a set growing period

6 - extent of spare refining capacity in the oil and gas industries

In the short run: if prices increases, output cannot rapidly increase - inelastic

In the long run: if prices increases, spare capacity, output increases - elastic

Is building 2000 new homes in the town to meet rising demand

Elastic or inelastic supply?

Inelastic

Why?

Houses can take years or months to build, so even if prices rise, supply cannot increase quickly

Is ordering Domino's Pizza a peak times and expecting it within half an hour elastic or inelastic supply?

Inelastic

Why?

Because Domino's cannot quickly increase production, even when demand rises sharply

Full capacity at peak times

Is seat at Premier league stadium, elastic, or inelastic supply?

Inelastic

Why?

A stadium has a fixed number of seats, which cannot be increased quickly, so it's inelastic

What does supply being elastic mean?

Producers and firms can increase output quickly and easily in response to a rise in price (without increasing their cost and prices)

Examples of when supply tends to be more elastic?

• supplier has plenty of spare capacity to increase output quickly

• high stock levels are immediately available to meet rising demand

• there is a short production time frame to get extra products to market

• ease of factor substitutes is high - ie. resources can be allocated easily

Give 2 facets that affect the price elasticity of supply of e-vehicles charging points in the UK

1. Availability of land

   - long delays - takes time - supply cannot expand quickly - inelastic

2. Spare capacity and installation

   - takes time - cannot expand quickly - inelastic

Brief way of remember this?

Slow response - inelastic

Fast response - elastic

What might be cause the supply of charging points to shift outwards and become more elastic over time?

• increase in government subsidies

• technological improvements

• access to land

• regulations in the industry - (e.g residential homes with charging points)

Become more elastic - as these allows capacity to increase quickly - elastic

MCQ

A firm estimates that the price elasticity of supply is +1.5

What does this indicate?

A. A firm has available stock

B. The firm has no excess capacity

C. The firm operates in a competitive market

D. The firm raises prices by 10% and its total revenue increases by 15%

Answer

A

MCQ

A product has high price elasticity of supply

Why?

A. It has a high opportunity cost

B. It has a non-perishable nature

C. It is classed as an inferior good

D. It is classed as a luxury good

Answer

B

What does this mean?

Non-perishable products can be stored better and for longer

So when prices rise, they can supply more by releasing stock quickly (elastic)

The table shows the estimated price elasticity of supply for cotton in selected countries.

Which one of the following can be deducted from the table?

A. Supply is elastic in India

B. Supply is price inelastic in Mexico

C. Supply is least responsive to a change in price inelastic Egypt

D. Supply is most responsive to a change in price in Australia

Answer

C