Price elasticity of supply

What does PES measure

measures the responsiveness of quantity supplied given a change in price

PES calculation

% change in Qs / % change in P

What law makes PES always positive

Always going to get a positive number when we calculate PES, because the law of supply.

What is the law of supply

When price rises, quantity supplied increases (+ + = positive); when price falls, quantity supplied decreases (- - = positive).

PES > 1

supply is price elastic

price elastic supply meaning

any price change, the change in Qs will be proportionally greater

PES < 1

supply is price inelastic

PES < 1

supply is price inelastic

price inelastic supply meaning

any price change, the change in Qs will be proportionally less

PES = 0

supply is perfectly price inelastic

perfectly price inelastic meaning

Any price change, change in Qs will never change

PES = ∞

Supply is perfectly price elastic

perfectly price elastic meaning

any fall in price means that the Qs will be reduced to 0

PES = 1

supply is unit price elastic

unit price elastic meaning

% change in Qs is equal to the % change in price

Price of Barrels of Oil increase $40 to $60
Qs increases 150 to 180 barrels

Working out the PES

PES = % change in Qs / % change in P = 20% / 50% = + 0.4 

For the example calculation explain what the PES means

Draw a PES elastic/inelastic diagram

Draw a PES perfectly elastic/inelastic diagram

What mnemonic determines whether supply for a good/service is price elastic or price inelastic

pssst

P

Production Lag

S

Stocks

S

Spare capacity

S

substitutability of FoPs

Mnemonic for factors of production

Lions Love Chasing Elk

L

Land

L

Labour

C

Capital

E

Entrepreneurship

T

Time

What happens production lag is longer

the more price inelastic supply becomes, because increase production is harder

What happens when stock levels are high?

makes supply more price elastic, enabling quick responses to price and demand increases.

Spare capacity

makes supply more price elastic, as it allows you to easily utilize spare capacity to increase production and meet rising prices or demand.

What happens when factors of production (FoPs) are highly substitutable?

The more substitutable FoPs are, the easier it is to increase production in response to rising prices or demand, making supply more price elastic.

Time explanation

The responsiveness of supply to price changes depends on the time period

Why is supply price inelastic in the short run (SR)?

because at least one factor of production, usually land or capital, is fixed, making it hard to vary production.

Why is supply price elastic in the long run (LR)?

all factors of production become variable, allowing to easily increase/decrease production, making supply price elastic.

price inelastic supply meaning

any price change, the change in Qs will be proportionally greater

Unit elasticity of supply diagram

What happens when production lag is shorter?

make it easier to increase production, leading to more price elastic supply.

What happens when stock levels are low?

Low stock levels make supply more price inelastic.

What is an example of substitutable FoPs in action?

A car manufacturer can shift workers from producing cars to vans if van demand surges, showing how substitutable FoPs can lead to more price elastic supply.