Ch 6 - Price Elasticity of Supply

• Price elasticity of supply: measure of how much the supply of a product changes when there is a change in price of a product

  1. If the price of a product increases, products will increase quantity supplied to increase profits

  2. When quantity increases in response to higher prices depending on price elasticity of supply of products

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• Formula:

  • PES = %△Qs of the product / %△ P of the product

  • △ = change

  • % = percentage

  • Qs = quantity supplied

  • P = price

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• Range of values of price elasticity of supply:
  • PES = 0, no response, perfectly inelastic
  • PES = ∞, extreme change, perfectly elastic
  • PES > 1, elastic supply
  • PES < 1, inelastic supply
  • PES = 1, unit elastic supply

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1. Elastic: change in price → greater proportionate

   • Change in quantity supplied 1>∞

2. Inelastic: change in price → less than proportionate

   • Change in Qs 0>1

3. Unit elastic supply: change in price → proportionate change in quantity supplied

   • PES = 1

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• Determinants of price elasticity of supply:

  1. Time period: supply is relatively inelastic + short time period
  • If price of a commodity rises, elasticity will be more elastic
  1. Ability to store output: goods with the ability to be safely stored have relatively elastic supply
  2. Factor mobility: higher mobility, greater capacity of supply
  3. Changes in marginal cost of production: after expansion of output, if marginal cost increases + marginal return declines → price elasticity of supply → less elastic
  4. Excess supply: excess capacity → rising prices → elastic supply
  5. Availability of infrastructure facilities: if available for expanding outputs resulting of rises prices, elasticity → more elastic

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• Commodity: tangible good that can be sold/bought/exchanged for products of similar values

  • Tend to have inelastic supply, △P cannot lead to large increase in quality supplied

  • Primary commodities: tend to have a low PES because there cannot be a sudden change in how much is produced

  • Manufactured good: good that is produced by application of labour/capital/raw materials

  • Elastic and is easier to decrease quantity supplied as a result to a change in price

  • tend to have a high PES because it is easier to change production in factories or shops.

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