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 they 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 CoP doesn’t rise greatly as a firm uses more FoP

Factors that assist in preventing a significant rise in costs

• Unused FoP

  • 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 so I can easily make more

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