a) Price elasticity of supply

a) understanding of price elasticity of supply

b) use formula to calculate price elasticity of supply

c) interpret numerical values of price elasticity of supply

d) factors that influence price elasticity of supply

the law of supply = price of a product increases → quantity supplied increases

price elasticity of supply = how sensitive the change in quantity supplied is to the change in price

PES = (%ΔQS) / (%ΔP)

• price elasticity of supply = percentage change in quantity supplied / percentage change in price

if PES = 0

• PES is perfectly inelastic

  • quantity supplied is completely unresponsive to any change in price

  • gradient = 0 (vertical)

if 0 < PES < 1

• PES is relatively inelastic

  • change in price → smaller change in quantity supplied

  • gradient > 1

if PES = 1

• PES is unitary elastic

  • change in price → equal change in quantity supplied

  • gradient = 1

if PES > 1

• PES is relatively elastic

  • change in price → larger change in quantity supplied

  • 0 < gradient < 1

if PES = infinite

• PES is perfectly elastic

  • change in price → zero quantity supplied

  • gradient = 0 (horizontal)

determinants of PES

• mobility of the factors of production

  • high mobility = high PES

• availability of raw materials

  • high availability = high PES

• ability to store goods

  • high ability = high PES

• spare capacity

  • high capacity = high PES

• time period

  • longer time period = high PES