Transcript Price Elasticity of Supply

Price Elasticity of Supply
Lesson Objectives:
Define Price Elasticity of Supply
Learn the formula for and calculate PES
Analyse the factors affecting the Price Elasticity
of Supply
Price Elasticity of Supply

We know that as prices increase, firms are
willing to increase their supply… But how
much more do they increase supply by?
How responsive is supply to changes in
price? This is what PES shows.
Key Term – Definition
 Price Elasticity of Supply measures the
proportionate change in quantity supplied as
a result of a change in price
The Formula
% ∆ Quantity Supplied
% ∆ Price
Price elasticity of supply will be
positive as both the top and the
bottom of the formula will either both
be positive or both be negative.
Price Elasticity of Supply is:
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Perfectly Inelastic (zero) if there is no response in
supply to a change in price
Inelastic (between zero and one) if there is a less than
proportionate response in supply to a change in price
Unitary (one) if the percentage change in quantity
supplied equals the percentage change in price
Elastic (between one and infinity) if there is a more
than proportionate response in supply to a change in
price
Perfectly Elastic (infinity) if producers are prepared to
supply any amount at a given price
Price Elasticity of Supply – Illustrated…
What is the most desirable PES for a firm?
It is desirable for a firm to be highly responsive to
changes in price and other market conditions. This is
because a high PES makes the firm more competitive
than its rivals and it allows the firm to generate more
revenue and profits.
What Factors Determine Price Elasticity of
Supply ?
How easily can firms respond to price increases? Is
it quick and simple to supply more when prices go
up? Or, like the supply of oil, is it difficult to
suddenly increase production – do new wells need
to be drilled, new pipelines need to be built etc, can
supply respond instantly?
What does this tell you about the
product?
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When supply is elastic, producers can
increase production without cost or delay
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When supply is inelastic, firms find it hard to
change their production levels in a given
time period.
Factors affecting the Elasticity of Supply:
1.
Time – in the short run a producer may not be able to
meet increases in demand, so supply will be more inelastic.
In the long run however they can increase their productive
potential by buying new machines, hiring new workers or
even building a new factory to meet the increasing demand.
If a product takes a long time to
produce/build/make then supply will be inelastic
Other Factors affecting the Price Elasticity
of Supply :
2. The availability of raw materials
3. The availability of stocks or stock piling
4. The ease of switching between alternative production – if
resources can be used for more than one purpose
5. The availability of spare capacity
6. Ability to switch between different methods of production
7. Level of unemployment
8. The nature of the product – e.g./ agricultural
Factors Affecting Elasticity of Supply
Level of stocks and work in progress
Level of
spare capacity
Factors
affecting the
Elasticity Of
Supply
Substitutability of factors of
different methods of production
Time period
Production lags
Activity
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(a)
(b)
(c)
(d)
(e)
(f)
(g)
For each of the following explain whether
you think supply would be elastic or
inelastic. Justify your answers using the
relevant theory.
Beef
Cars
Paper Clips
Fresh Strawberries
Socks
Tinned vegetables
Aeroplanes