Chapter 6 - Price Elasticity of Supply

Price elasticity of supply

The responsiveness of quantity supplied to a change in price (always positive)

PES formula

%Change in QS / %Change in Price

Range of PES Values?

Inelastic < 1

Elastic > 1

Unitary = 1

Perfectly Inelastic PES

• A change in price has no affect on supply because in the short run it is IMPOSSIBLE to change supply (stadiums and such)

Perfectly Elastic PES

• If the price is ever changed there is no supply

• at price P, there’s endless supply

What are the determinants of PES

• How much costs rise as output rises

• Time period considered

• The ability to store stock

Time period considered (determinant of pes)

• PES right NOW - Very inelastic, it is impossible to alter the FoP being used

• PES short run - less inelastic, maybe firms can increase Land and labour

• PES long run - more elastic than before, All FoP are variable

Ability to store stock (PES determinant)

If a firm has the ability to store their stock the will be able to react to price changes very swiftly (elastic)

How much costs rise as output rises (PES Determinant)

• If MC/TC rises significantly as firms try to increase Supply - INELASTIC (a big price rise is needed to incentivise/justify increasing supply)

• If TC doesn’t rise significantly a firm will increase QS by taking advantage and making more profit at higher prices

• TC doesn’t rise greatly if the Cost of FoP doesn’t rise greatly as a firm uses more of them

Factors that assist in preventing a significant rise in costs

• Unused stock

  • if i have FoP lying around I can use it easily for a very little price (ELASTIC)

• FoP mobility

  • If FoP can be moved from one productive use to another - very elastic

  • As an example assume its very easy to go from making 1L bottles to 2L bottles. If the price of 2L bottles goes up the extra cost won’t be great

PES Primary Commodities

PES INELASTIC:

• when Price rises, Supply can’t rise - TAKES TIME TO GROW

• when Prices falls, supply can’t fall - ITS ALREADY HARVESTED

PES secondary commodities

• MORE ELASTIC

• likely that there’s more spare capacity/mobile FoP/ stock