1.6 Price Elasticity of Supply (PES)

PES

measures how responsive the quantity supplied is to a change in prace of the same good

What does it mean when supply is elastic?

Supply is elastic when quantity supplied changes more than the change in price (PES>1).

• producers can respond quickly to price changes

What does it mean when supply is inelastic?

Supply is inelastic when quantity supplies changes less than the change in price (PES<1)

• producers can’t easily increase output

→ because there are fixed factors of production, time to adopt new technology, limited resources in the short term

What is perfectly inelastic supply?

PES = 0

Quantity supplied does not change at all, even if the prices change .

• supply is fixed = vertical supply curve

what is perfectly elastic supply?

PES = infinity..

Producers are willing to supply any amount at a specific price, but none if the price drops

Short-run affect PES

supply is inelastic because firms can’t easily change production

Long-run affect PES

supply is more elastic because firms have time to expand capacity or enter/exit market

Why is PES important for governments ?

• Helps governments understand how producers will respond to price changes

• How effective their policies may be

• if PES is inelastic policies like price floors, subsidies may have limited impact on quantity supplied

Why do primary commodities usually have inelastic supply?

1. they take a long time to produce

2. FOPs are not easily adjustable in short term

Why do manufactured goods often have more elastic supply?

1. easier and faster to increase output

2. factories can adjust production more easily and inputs (FOPs) are more mobile (moved or switched easily to produce different goods or increase output)

Determinants of PES

1. Time

Short-run inelastic, long run - elastic

1. ability to keep stocks

2. spare capacity

→ with existing goods increase production

4. mobility of FOPs

→ how easy or difficult it is to add factors to the production process - to increase production/productivity

5. number of suppliers