Transcript Price elasticity of supply

The responsiveness of the quantity supplied to a
change in the price of the product
Formula
 PES = % change in quantity supplied
% change in price
 Value will always be positive – why?
 Size of price elasticity of supply is important
What do the figures mean?
 Between 0 and 1, elasticity of supply is inelastic
 Greater than 1, supply is elastic
 Equal to 1, change in price causes and exactly
proportional change in the quantity supplied
Factors influencing PES
 Time period
 (more elastic in the longer run)
 Availability of factors of production
 Availability of stocks of the product
 Higher the stock, more elastic
 Service sector – cannot store service therefore
infinitely inelastic
PES: inelastic or elastic?
 Milk production
 Bottling mineral water
 Car manufacturing
 Aircraft production, e.g. Airbus A380
Question
 The following estimates have been made for the
PES for two agricultural crops:
green peppers
0.26
fresh spinach
4. 70
Explain what the data mean & why there is a big
difference in the PES for these crops
Business relevance
 In general, firms will try to make their supply as
elastic as possible
 Firms aim to cash in on price rises by selling more of
the product
 If prices are falling, firms will move resources away &
into more profitable alternatives
Exam question
 The price elasticity of demand for a premium grade
hamburger meal at a well-known fast food outlet has
been estimated to be -0.1; for a healthy meal option
it is estimated at 0.4 and for icecream sundaes -1.6.
(a) Explain what these figures mean (4 marks)
(b) Comment upon how this data may be used by a
fast food outlet (6 marks)
YED Question
 Recent research for an inclusive tour operator
produced the following estimates for the income
elasticity of demand to selected holiday destinations
below. Explain what each means.
Spain - Majorca
-0.15
Croatia
1.10
USA – Florida
1.30
South Africa
2.05
XED Question
 Calculate the XED from the data below & say what
the estimate means.
Per
kilo
Kilos
(000s)
Original price of
lamb
£3.00
Quantity
demanded of beef
200
New price of
lamb
£3.75
Quantity
demanded of beef
300
XED Question
 Calculate the XED from the data below & say what
the estimate means.
Per
kilo
(000s)
Original price of
petrol
£1.00
Quantity
demanded of cars
200
New price of
petrol
£1.05
Quantity
demanded of cars
198
XED Question
 An investigation conducted by Leeds University for the
Competition Commission produced the following estimates of
XED for rail and coach travel between Norwich and London.
Cross elasticity of
demand
5% increase in rail fares
+3.10
10% increase in rail fares
+3.10
5% increase in coach fares
+0.30
10% increase in coach fares
+0.30
Explain what these estimates mean and their business
significance for rail and coach operators
Income elasticity of demand
Research at the University of Kent has produced the
following estimates of the income elasticity of demand for
imports into selected countries in Latin America:
Argentina
3.66
Chile
2.03
Dominican Republic
0.92
Peru
1.56
Account for possible variations in these estimates and
comment on their likely significance for businesses that
are located in these countries.