1.2 Price elasticity of Supply (PES)
PES =
% change in QS / % change in P
The short run is a period in which at least
1 fixed factor of production is fixed
When not given P or QS use
10% as P to work out QS
Factors that influence PES are:
The level of spare capacity, The state of the economy, How easily production can be switched to a different product, The level of stock, Perishability of goods, Can new firms easily enter the market?, Availability of substitutes, Short or long run, Nature of the product
If PES is inelastic, suppliers will find it hard to react to
change in prices
Availability of substitutes- A product with lots of substitutes can be quickly altered if the prices rise or fall making it
elastic
Can new firms easily enter the market?-If producers can easily enter a new market the supply of a particular good is likely to be
elastic
How easily production can be switched to a different product- If production can be easily switched, supply would be more
elastic
In the long run all factors can be adjusted so firms can increase production in response to price increases making supply more
elastic
The level of spare capacity- If firms have spare capacity, this means that output can be increased quickly if the price of a good increase, this is called
elastic
The state of the economy- In a recession there are many unemployed resources, therefore more spare capacity, this is
elastic
The level of stock- Firms with higher stock levels can increase supply quickly, this makes supply more
elastic however firms with little/no stock supply tends to be more inelastic
The perfectly elastic supply curve is
horizontal
But if firms do not have any other spare capacity, they may not be able to increase output if the price of a good rises, this is called
inelastic
But if there are few substitutes there will be difficulty to respond to price making it
inelastic
Perishability of goods- If goods are perishable they are
inelastic as not much stock can be kept (e.g. fruit) but if they can be kept in stock they are more elastic (e.g. toasters)
However supply would be more
inelastic if cost of entering industry are high
Short or long run- Supply can only increase if firms have stocks of the product to sell therefore it is difficult to adjust production in the short run making supply
inelastic in the short run
Supply is likely to be price inelastic if it is complex to
make and raw material are scare and in the short run
When PES=infinity supply is
perfectly elastic as change in price will lead to an infinite amount being supplied
When PES=0 supply is
perfectly inelastic as a % change in price will have no impact on supply
When PES is more than 1 supply is
price elastic as the % change in price will lead to a greater proportionate change in QS
When PES is less than 1 supply is
price inelastic as the % change in price will lead to a smaller proportionate change in QS
PES will always be positive because when the
price of a good increases, more will be supplied
Supply is likely to be price elastic when the good is
quick to get and easy to make and in the long run
If PES is elastic, suppliers can react
quickly to changes in price
Also outputs can expand significantly if the price of a good remains high in the long run, therefore supply is likely to be
relatively elastic also in the long run
Nature of the product- It takes a lot of time to change the nature of the product (e.g. beef) so supply is likely to be
relatively inelastic
The price elasticity of supply is the
responsiveness of S of a good to its change in P
There is no set amount of time for the
short run and it varies between different industries
The relatively elastic supply curve is
slightly tilted horizontal line
The relatively inelastic supply curve is
slightly tilted vertical line
When PES=1 supply is
unitary elastic as a % change in price will lead to the same % change in QS
In the long run all factors of production are
variable
The perfectly inelastic supply curve is
vertical