Chapter 6: Price Elasticity of Supply
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5 Terms
What is PES
how much the supply of a product changes when there is a change in the price of the product.
how to calc?
% change in Qs / % change in price
Range of possible values
Inelastic supply: The value of PES is less than one and greater than zero. If a product has inelastic supply, then a change in the price of the product leads to a less than proportionate change in the quantity supplied of it, and so the value of PES is greater than zero and less than one.
Elastic supply: The value of PES is greater than one and less than infinity. If a product has elastic supply, then a change in the price of the product leads to a greater than proportionate change in the quantity supplied of it, and so the value of PES is greater than one and less than infinity.
Unit elastic supply: The value of PES is equal to one. If a product has unit elastic supply, then a change in the price of the product leads to a proportionate change in the quantity supplied of it and so the value of PES is equal to one.
What are the determinants for PES?
how much costs rise as output is increases
existence of unused capacity
mobility of the factors of production
time period
ability to store stock
Is there a difference in the price elasticity of supply for primary commodities and manufactured products?
Commodities tend to have inelastic supply as a change in price cannot lead to a proportionately large increase in quantity supplied. For example, if there were to be an increase in the demand for cocoa, and therefore an increase in the price of cocoa, producers would be unable to respond with a proportionate increase in the quantity as it takes time to grow the cocoa.
On the other hand, the supply of manufactured goods tends to be more elastic as it is easier to increase or decrease quantity supplied in response to a change in price. This relates to the earlier determinants of PES. With manufactured goods, it is likely that there may be unused capacity in the industry, factors of production are more mobile, and it is relatively easy to store high levels of stock.