Price Elasticity of Supply (PES)
PES=
%change in Qs ---------------- %change in P
EXAMPLE: P= increases from £10 - £12 P=2/10 = 20/100 = 20% Qs= increases from 2000-2200 Qs= 200/2000 = 10/100 = 10%
%change in Qs ---------------- %change in P 10 --- 20 =0.5 PRICE- INELASTIC SUPPLY
PES is always...
+ve coefficient
example of perfectly elastic supply
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factors affecting PES? S I
STOCK (INVENTORIES) available to meet demand
how does stock (inventories) affect PES?
a low level of stock PES INELASTIC short term a shocks can easily be released on the market PES ELASTIC because firm is holding stock piles of goods to be sold, quickly respond to increase of price of goods
What is the price elasticity of supply (PES)?
a measure of the sensitivity of quantity supplied of a good or service to a change in the price of that good or service
what is long term
a period which a firm is able to vary its inputs of all the factors of production
what is short term
a period which a firm is not able to vary it inputs of all the factors of production
factors affecting PES? L
artificial LIMITS on supply
why is PES always +ve..
because as price increases supply will also increase, greater incentive and demand price decreases supply will also decrease, less incentive and demand
factors affecting PES? S
factor SUBSTITUTION possibilities
how does artificial limits on supply affect PES?
for example: the impact of quotas, impact of patents that limit which firms can supply of a product
SUPPLY CURVE FOR ELASTIC PES
horizontal sloping, not steep
examples with PES
housing market. SUPPLY INELASTIC = planning permission, availability of land to develop, shortage of skilled labour TIME INELASTIC = time lag in the production process, new housing developments take months to complete.
Value of PES depends on..
how able and willing firms respond to change in prices. Firms running below full capacity - respond quickly to change in price
example of perfectly inelastic supply
in a fish market fish price increases BUT there is a fixed amount of fish available for purchase, so supply unable to do anything. MOMENTARY INELASTIC
Momentary supply is ..
inelastic
how does time frame allowed affect PES?
momentary period FIXED SUPPLY short run INELASTIC SUPPLY long run ELASTIC SUPPLY
Supply becomes more elastic..
over time by installing new machinery or building new factories - supply becomes more elastic - supply curve out and more horizontal
PES=infinity
perfectly elastic supply
PES=0
perfectly inelastic supply
long term has...
price elastic supply
short term has...
price inelastic supply
PES>1
price-elastic supply
PES<1
price-inelastic supply
factors affecting PES? C
spare production CAPACITY available
factors affecting PES? T
the TIME frame allowed
PES=1
unit-elastic supply
SUPPLY CURVE FOR INELASTIC SUPPLY
vertical sloping, very steep, sharp gradient
what is perfectly inelastic supply?
whatever the price. firms will supply same amount. A CHANGE IN PRICE HAS NO EFFECT ON THE QUANTITY SUPPLIED ONTO THE MARKET
what is perfectly elastic supply?
whatever the supply. firms will sell at the same price. A FIRM CAN SUPPLY ANY QUANTITY AT THE SAME MARKET PRICE -occurs when firm can produce output at constant cost/unit -no capacity limits its production
how does factor substitution possibilities affect PES?
when factor substitutions is possible (e.g. labour and capital inputs can be easily switched) can be achieved at a low cost, supply will be INELASTIC when factors are highly specialised substitution may be harder and supply will be INELASTIC
elastic supply
when supply is elastic producers can increase production levels without a rise in cost or a time delay
inelastic supply
when supply is inelastic firms find it hard to change their production levels in a given time period
price elastic supply
when supply is relatively elastic a change in demand can be met without a change in market price
price inelastic supply
when supply is relatively inelastic a change in demand affects price more than quantity supply
how does spare production capacity availability affect PES?
when there is spare capacity businesses can easily expand output to meet rising demand without upward pressure on cost - pes ELASTIC