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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.

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.

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