9 price elasticity of supply price elasticity of

Price elasticity of supply

Responsiveness of supply to a change in price

Inelastic supply

Change in price results in a proportionately smaller change in the quantity supplied (price inelastic

Elastic supply

Change in price results in a proportionately greater change in the quantity supplied (price elasticity)

Calculating the value of price elasticity of supply

Price elasticity of supply = percentage change in quantity supplied

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Percentage change in price

Interpreting the value of price elasticity of supply

• PES is less than 1 : supply is inelastic

• PES is greater than 1 : supply is elastic

• PES = 0 : supply is perfectly inelastic

• PES = ♾: supply is perfectly elastic

• PES = 1 : supply is unitary elasticity

Perfectly elastic (supply)

Where PES = ♾(producers will supply an infinite amount at the given price)

Perfectly inelastic (supply)

Where PES = 0 ( the quantity supplied is fixed and cannot be adjusted whatever the price)

Unitary elasticity (supply)

Where PES = 1 (a change in price will be matched by an identical change in the quantity supplied)

Price elasticity and the slope of the supply curve

• vertical (perfectly inelastic supply curve) which means that a price change will not affect the quantity supplied at all.

• Horizontal (perfectly elastic supply curve) which means that producers are prepared to supply any amount at a given price

• Straight line supply curve that passes through the origin (price elasticity equal to 1) which mean’s the percentage change in price is always the same as edge percentage change in quantity supplied.

Factors influencing PES

• Factors of production

  • Supply will be elastic if producers have access to the factors of production and if they are mobile.

  • Supply will be inelastic if such resources are less mobile

• Availability of stocks

  • Supply will be elastic if producers can hold stocks of goods can respond quickly to price change.

  • Supply will be inelastic where it is impossible or expensive to hold stocks. For example, perishable goods such as fruits and vegetables.

• Spare capacity

  • Supply will be more elastic if producers have spare capacity because with spare capacity, producers are able to sauce more with their resources

  • Supply will be inelastic if firms are running at full capacity because output cannot be increased at short notice.

  • Is they are given more time, they can build a bigger factory and buy more machinery

• Time

  • The spies with which producers can react to price change in the market can affect PES.

  • Supply will be elastic, the more time produces have to react to price change,

  • Supply will be inelastic, because it is not possible to increase supply quickly due to production limitations.

PES for manufactured and primary products

• Goods that can be produced quickly out are likely to have elastic supply because modern manufacture are quite flexible and can adjust production levels at short notice

• Primary goods such as agricultural goods can result in supply to be inflation because it takes time for it to grow or find (gold and diamonds) . Production can be expensive and time consuming.