2.3 Price Elasticity of Supply (PES)

Flashcards covering the key concepts of Price Elasticity of Supply (PES) from the provided lecture notes.

Price Elasticity of Supply (PES)

An economic concept that evaluates how the quantity supplied of a good or service responds to changes in its price.

Elasticity in Economics

Measures how one variable responds to changes in another variable.

PES Formula

Percentage change in quantity supplied divided by the percentage change in price, PES = (% Change in Quantity Supplied) / (% Change in Price).

Elastic Supply (PES > 1)

Characterized by a substantial change in quantity supplied even with minor price changes.

Inelastic Supply (PES < 1)

Reflects a scenario where the quantity supplied changes minimally in response to price changes.

Unitary Elasticity (PES = 1)

Indicates a proportional response of supply to price changes.

Short-Term Elasticity

Typically inelastic due to constraints in altering production levels rapidly.

Long-Term Elasticity

More elastic as suppliers have more time to adjust their production processes and capacities.

Ease of Accessing Resources

Directly impacts the ability to ramp up production, affecting elasticity.

Flexibility in Resource Usage

Greater flexibility in using alternative resources or inputs can lead to more elastic supply.

Technological Improvements

Enhance production efficiency and flexibility, leading to a more elastic supply.

Production Costs

High fixed costs can result in inelastic supply, while variable costs allow for more flexibility in production adjustments.

Adjusting Production

Suppliers use PES as a guide to scale up or down their production in response to market signals.

Pricing Strategy

Knowledge of PES assists in developing pricing strategies that maximise revenue and market share.

Long-Term Planning

Suppliers consider PES for long-term strategic planning, including investments in production capacity and technology.

Resource Management

Efficient allocation of resources is guided by the understanding of supply elasticity.

Competitive Markets

Typically exhibit more elastic supply due to the necessity for suppliers to remain competitive.

Monopolistic Markets

Tend to have inelastic supply as the market power allows suppliers to be less responsive to price changes.

Seasonal and Agricultural Markets

Show varied elasticity due to natural constraints and seasonal factors affecting production.

PES > 1 (Elastic Supply)

Indicates that the supply is sensitive to price changes. A small increase in price results in a larger increase in quantity supplied.

PES < 1 (Inelastic Supply)

Suggests that supply is relatively unresponsive to price changes. Changes in price have a lesser impact on the quantity supplied.

PES = 1 (Unit Elastic Supply)

This is a balanced scenario where any change in price is matched by an equal percentage change in quantity supplied.

PES = 0 (Perfectly Inelastic Supply)

The quantity supplied remains constant regardless of price changes.

PES = ∞ (Perfectly Elastic Supply)

Any small change in price leads to an infinite change in the quantity supplied.

PES Coefficient

The value of the PES coefficient has significant implications on supplier behaviour and market dynamics.

Government Policies

Government interventions such as subsidies, taxes, and regulations can also impact the elasticity of supply.