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

• Formula:

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

• △ = change

• % = percentage

• Qs = quantity supplied

• P = price

• 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

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

• 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

2. Ability to store output: goods with the ability to be safely stored have relatively elastic supply

3. Factor mobility: higher mobility, greater capacity of supply

4. Changes in marginal cost of production: after expansion of output, if marginal cost increases + marginal return declines → price elasticity of supply → less elastic

5. Excess supply: excess capacity → rising prices → elastic supply

6. Availability of infrastructure facilities: if available for expanding outputs resulting of rises prices, elasticity → more elastic

• 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.