1.2.4 Price elasticity of supply 2017

Price Elasticity of Supply (PES)

A measure of the responsiveness of quantity supplied to a change in price.

PES Formula

% change in quantity supplied / % change in price.

Perfectly Inelastic Supply

Supply does not change in response to price changes (PES = 0).

Price Inelastic Supply

Quantity supplied changes less than proportionately to price changes (0 < PES < 1).

Unitary Elasticity

Quantity supplied changes proportionately to price changes (PES = 1).

Price Elastic Supply

Quantity supplied changes more than proportionately to price changes (PES > 1).

Perfectly Elastic Supply

Suppliers will supply any amount at a certain price (PES = ∞).

Factors Affecting PES

Spare capacity, levels of stocks, time period, and ease of factor substitution.

Spare Capacity

When businesses can expand output easily to meet rising demand, making PES elastic.

Time Period Influence on PES

Supply is more inelastic in the short run but becomes more elastic in the long run.

Stock Levels

Low stock levels make supply inelastic short-term but more elastic when stocks can be released.

Ease of Factor Substitution

The ability to switch inputs (like labor or capital) influences elasticity of supply.

Incidence of Tax

The distribution of the tax burden between buyers and sellers in a market.

Increase in Supply and Price Relationship

As price increases, supply is likely to increase due to profitability.

Agricultural Supply Elasticity

Agricultural markets often illustrate price elasticity of supply due to time lags and production conditions.

Housing Supply Elasticity

The price elasticity of supply for housing can be highly inelastic due to planning and development constraints.

Short-run vs Long-run Supply Elasticity

Short-run supply is typically inelastic because firms cannot easily adjust production levels.

Business Relevance of PES

A more elastic PES indicates that a firm is flexible in supply adjustments in response to market changes.

Percentage Change in Supply Calculation

(Change in supply / Original supply) x 100.

Market Flexibility

A firm with a high PES coefficient is more competitive due to its ability to adjust supply readily.

Price as an Incentive

Higher prices incentivize firms to increase supply due to greater profitability.

Producer Substitutes Impact on PES

The number and degree of substitute goods affect the elasticity of supply.

Labor Shortages

Labor shortages can limit the elasticity of supply due to difficulties in hiring skilled workers.

Artificial Limits on Supply

Factors like patents can restrict competition and cause inelastic supply.

Price Elasticity of iPads

Determined by factors such as production capacity, market demand, and competition.

Price Elasticity of Downloaded Music

This can be highly elastic due to low production costs and high availability.

Consequences of Inelastic Supply

Inelastic supply can lead to higher prices during demand surges, affecting consumers.

Business Strategy Influenced by PES

Businesses may adjust strategies based on their understanding of PES and market conditions.

PES Coefficient Interpretation

A higher PES coefficient indicates greater responsiveness of supply to price changes.

Trends Affecting Global Food Supply PES

Stronger global demand and production constraints influence price elasticity in food markets.

Market Intervention Considerations

Understanding PES can assist in evaluating the impacts of government actions like taxes or subsidies.

Price Quantity Graphs

Graphs can represent the relationship between price changes and quantity supplied.

Dynamic Supply Conditions

Market conditions, regulation, and technology can dynamically influence supply elasticities.

PES and Consumer Welfare

Elasticity of supply affects price stability and consumer access to goods.

Formula Rearrangement for PES

Different arrangements of the PES formula can clarify the relationships between variables.

Long-term Planning for Supply

Long-term strategies involve considering how to adjust production efficiently.

Elastic vs Inelastic Supply

Elastic supply indicates a quick response to price changes; inelastic indicates a slow response.

Evaluation of PES Applications

The usefulness of PES can vary based on business models and industries.