3. Price Elasticity of Supply

What is price elasticity of supply? (PES)

A measurement of the responsiveness of supply as price changes.

How is PES calculated?

% change in quantity supplied / % change in price

What is the law of supply?

Increase in price = Increase in output

Fall in price = Fall in output

Draw an inelastic supply curve

Draw an elastic supply curve

State 4 factors which affect the price elasticity of supply.

1. Availability of producer substitutes - Many = High elasticity.

2. Complexity factors - complicated, time? e.g housing = inelastic

3. Capacity level - Spare capacity = elastic

4. Storage- easier to store = more elastic

Why is PES always positive?

It represents the positive relationship between price and supply.

What are the uses of PES?

1. Firms can respond quickly to changes in price and demand.

2. Firms can take measures to improve elasticity of supply e.g train staff, update technology, get more spare capacity etc

What are the limitations of PES?

- Values are estimates

- Information used to calculate may be outdated

- Only useful in short-term as elasticity changes over time.