A

4d. Price Elasticity of Supply

Price elasticity of supply

Price elasticity of supply measures the responsiveness of the quantity supplied to changes in price

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Calculating price elasticity of supply

  • There are 2 ways to calculate PED depending on the information you are given
    • If you are given numbers you use -

PED = P/Qs * ΔQs/ΔP

  • If you are given percentages you use:

PED = %ΔQ s/ %ΔP

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Supply could be inelastic because :

  • Firms operating close to full capacity.
  • Firms have low levels of stocks, therefore there are no surplus goods to sell.
  • In the short term, capital or land might be fixed e.g. firms do not have time to build a bigger factory.
  • If it is difficult to employ factors of production, e.g. if highly skilled labour is needed
  • With agricultural products, supply is inelastic in the short run, because it takes at least six months to grow new crops. In September the farmer cannot suddenly produce more potatoes if the price goes up.

Link to the time it takes

E.g. like housing and agricultural goods

An increase in the price of a good will seea proportionately smaller increase in the \n Supply could be elastic because :

  • If there is spare capacity in the factory.
  • If there are stocks available.
  • In the long run, supply will be more elastic because capital can be varied.
  • If it is easy to employ more factors of production.
  • If a product can be sold on the internet which increases the scope of international competition and increases options for supply.

E.g. loom bands, other trends

An increase in the price of a good will seea proportionately large increase in the \n

Examples of Elastic/Inelastic Supply

Examples of products with elastic supply:

  • Manufactured Goods

  • Unskilled Labour e.g. waiter

  • Digital Downloads

  • Gift cards

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Examples of products with inelastic supply:

  • Commodities (oil, diamonds)

  • Crops (wheat, rice)

  • Specialist medicines

  • Skilled Labour e.g. lawyer

  • Pantomime

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PES Over Time

In the very short run, supply is perfectly inelastic as output cannot change.

In the short run (when at least one factor of production is fixed), output can adjust, but not fully, so the supply function is likely to be more inelastic.

In the long run, all the factors of production are variable so supply is more elastic.

With reference to fig1, explain one possible reason for the differences in price elasticity of supply of new housing between countries. (1 mark for understanding (definitions or calculations), 2 for application, 2 for exploring the difference)

The price elasticity of supply measures the responsiveness of the quantity supplied to changes in price, in fig1 both the Netherlands and Great Britain have inelastic supply whereas Finland has a unitary supply and the USA is elastic with a PES of 2, this may be due to the commodities of land that each of these countries has, as both the Netherlands and Great Britain may not have enough land to be responsive to a change in the price of housing whereas the USA can provide more housing and be more responsive to the changes in price much faster. Finland has an equal responsiveness to supply as it is to a change in price so a 10% increase in price will cause a 10% increase in supply.

5/5