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

     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

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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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