2.6 Elasticity of supply Notes

2.6.1 price elasticity of supply (pes)

Introduction to Price Elasticity of Supply

  • Price Elasticity of Supply (PES) measures how much the quantity supplied of a good changes in response to a change in its price.

  • It helps businesses and policymakers understand how flexible supply is in different markets.

  • Unlike demand, which focuses on consumer behavior, PES focuses on how producers respond to price changes.

Price Elasticity of Supply: A measure of the responsiveness of quantity supplied when there is a change in price.

Think of PES like a rubber band - some are stretchy (elastic) while others are stiff (inelastic). The more elastic the band, the more it stretches when you pull it.

When the price of wheat increases by 10% and farmers increase their supply by 5%, the PES would be 0.5 (inelastic).

2.6.2 why pes for primary commodities is lower than for manufactured products (hl only)

Definition

Price Elasticity of SupplyA measure of the responsiveness of quantity supplied when there is a change in price.

The PES for primary commodities isgenerally lowerthan for manufactured products. This is due to the following reasons listed below.

Time

The time required to adjust production is a critical factor in determining PES.

  1. The production of primary products takes a long time. Even with abundant resourcesavailable, not much can be achieved.

  2. This makes the supply of primary commodities relatively price inelastic in the short run.

  3. In contrast, manufactured goods can often be produced quickly. Factories can increase output by working overtime, hiring additional workers, or using existing machinery more intensively.

  4. This makes the supply of manufactured goods more price elastic in the short run.

Example

In the short run, products like agricultural goods take a long time to plant and grow. Meanwhile, oil and minerals require a lot of time to make investments and production.

Comparatively, manufactured goods like technological devices can be mass-produced easier in comparison.

However, in the long run, primary commodity producers can change factors of production to be able to provide yields at a faster rate by using better technologies, farming practices, larger land, etc.

The same applies to manufactured goods producers as well.

Inventory (Stocks)

The ability to store products also affects PES.

  1. Many primary commodities are perishable and cannot be stored for long periods (many types of food expires quickly).

  2. This reduces the ability of producers to respond to price changes, making supply more inelastic.

  3. Manufactured goods are often easier to store. Firms with large inventories can quickly release goods into the market when prices rise.

  4. This makes them more responsive and their supply relatively elastic.

Self Review

  • Why is the PES for primary commodities generally lower than for manufactured products?

  • How do the determinants of PES explain this difference?

  • Can you think of examples where the PES of a primary commodity might be higher than usual?

Tok

To what extent should primary sectors be allowed to gain protection from low price elasticity of supply, price elasticity of demand and income elasticity from the government?