Elasticity of Supply 1.2.5

What is the price elasticity of supply?

Measures the relationship between the change in quantity supplied and a change in market price.

How to calculate PES?

PES = % change in quantity supplied / % change in price

What is the effect on firms when the supply is price elastic?

Producers can increase their output without a rise in cost or a time delay.

What is the effect on firms when supply is price inelastic?

Firms find it hard to change their production in a given time period.

What is the value of PES when it’s elastic?

PES > 1

What is the value of PES when it’s inelastic?

PES < 1

What is the value of PES when it’s perfectly inelastic?

PES = 0

What is the value of PES when it’s perfectly elastic?

PES = ∞

How does the stock of finished products and components effect elasticity of supply?

If stocks of raw material and finished products are at a high level, a firm is able to respond to a change in demand.

How does ease and cost of factor substitution/ factor mobility effect elasticity of supply?

If capital and labour are occupationally mobile, the elasticity of supply for a product is likely to be higher as resources can be mobolised to supply the extra output- more likely if skill set is low.

How does time period and production speed effect elasticity of supply?

Supply is more price elastic the longer the time that a firm is allowed to adjust its production levels.

How does complexity of the production process effect elasticity of supply?

If a production process is particularly complex then supply will be relatively price inelastic, for a product with a relatively simple production process then supply is more likely to be price elastic.