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Price Elasticity of Supply (PES)

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by

Miss Cummins

on 19 January 2017

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Transcript of Price Elasticity of Supply (PES)

Price Elasticity of Supply (PES)
Factors That Affect Elasticity of Supply
Degree of Elasticity of Supply
Elastic Supply Inelastic Supply
PES
PES measures the relationship between the proportionate/percentage change in quantity supplied and a proportionate/percentage change in price
ΔQs P1 + P2
ΔP Qs1 + Qs2

Responsiveness of supply to price change in the market
Low
price elasticity = changes in price have little influence on quantity supplied
High
price elasticity = as price increases there will be an increase in quantity supplied and vice versa
The greater the price elasticity, the more responsive and sensitive the producers are to change in price
PES is usually
positive
, as an increase in its own price (+) will normally lead to an increase in the quantity supplied
If PES < 1 = inelastic supply (supply is unresponsive to changes in price)
If PES = 1 = unitary supply
If PES > 1 = elastic supply (supply is responsive/sensitive to changes in price)
A
good
is
elastic
when the proportionate change in quantity supplied is greater than the proportionate change in price
The percentage change in supply is greater than the percentage change in price
P
Q
Elastic Supply
S
A
good
is said to be
inelastic
when a change in the price of a good causes less than a proportionate change in the quantity supplied of that good.
The percentage change in supply is less than the percentage change in price
P
Q
Inelastic Supply
S
Zero Elasticity
of Supply
Zero elasticity of supply
(perfectly inelastic supply) would indicate that an increase in the selling price of the good does not result in any increase in the quantity supplied

Example: The supply of fish on market day is fixed
P
Q
Perfectly Inelastic Supply
S
Firms Capacity
On the other hand, if the firm is operating close to maximum level of output , it will be less able to respond to changes in price, resulting in more inelastic supply
Therefore the firm can cope with price change and supply will be elastic
If the firm is operating with plenty of capacity, it should be able to increase production capacity more quickly without any great increase in costs
Mobility of the factors of production
A firm will allocate more resources to the production of goods when there's an increase in demand
Example: switching from Cork jerseys to ManU jerseys
Production process flexible = producers can respond my increasing supply
Greater ease of mobility from one product from another = more responsive the producer will be to change in supply
Time Period
Short run - inelastic as firm has to adjust

Example: fish and veg on market day
An increase in price cannot bring an immediate change in quantity supplied
Nature of the product
A fall in price of fish will not result in a proportionate change in quantity supplied on that day
Perishable goods - inelastic in supply
On the other hand, any increase in price of cars will lead to more than a proportionate change in supply of the commodity indicating elastic supply
Storage Costs
If storage costs are too low, producers may increase supply

Supply is elastic
Cost Conditions
If additional output can be supplied at a constant or reduced unit cost, the supply will be responsive to an increase in the selling price (elastic supply)

And visa versa
Products in joint supply
When a good is the less important of two goods that are in joint supply, then quantity supplied of this less important good will be relatively inelastic in response to changes in its own price
Example: supply would be less elastic for memory cards than cameras
Stock
If stocks of raw material and finished products are high, then the firm is able to quickly respond to changes in quantity demanded and is able to supply these stocks to the market more quickly
Full transcript