elasticity of supply

PES

measures the responsiveness of producers of a particular good to a change in the price of that good

• quantitative indicator of producer sensitivity to price changes

  • depends on how quickly a producers can ramp up/ scale back production when prices fall

PES equation

(Q2-Q1)/Q1

divided by

(P2-P1)/P1

PES = 0

perfectly inelastic supply

• no matter how much the price increases or decreases, the Qs remains fixed and unchanged

PES = infinity

supply is perfectly elastic

any change in price will lead to an infinite change in Qs (theoretical)

• supply can be close to perfectly elastic if there are large inventories for that good or it has a marginal cost of zero (no cost to produce additional units → digital goods such as pdfs)

PES between 0 and 1

inelastic supply

PES = 1

unitary elastic

PES > 1

elastic

determinants of supply (DAMT)

degree of unused capacity

ability to store inventories

mobility of factors of production

time to respond

degree of unused capacity

excess capacity: amount a firm is able to produce in the short-run without having to expand its plant size (its fixed factors of production)

• large amounts of unused capacity → elastic

• operating close to or at full capacity → inelastic

ability to store inventories

• if they can be stored in warehouses → elastic

• cannot be stored (perishable) → inelastic

mobility of the factors of production

the more mobile the factors of production, the more responsive a firm can be to changes in price

• low-tech manufactured goods and low skill services → relatively elastic

  • producer can easily hire more workers and acquire more raw materials to meet an increase in demand

  • easy to cancel orders for raw materials if there is a decrease in Qd

market period

the period immediately following a change in price

supply is highly inelastic

• producers do not have time to adjust their output to changes in price

short-run

the period of time over which land and capital are fixed, but labour is variable

relatively elastic compared to market period as the intensity which land and capital are used can increase (w/ productivity of labour)

producers can mobilise variable resources (labour) toward production

long run

supply is highly elastic

LR: the period of time over which all factors of production are variable

producers have time to respond to price changes (inventories)