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# PRICE ELASTICITY OF SUPPLY

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## Todd Cota

on 26 November 2014

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#### Transcript of PRICE ELASTICITY OF SUPPLY

price elasticity of supply
PRICE ELASTICITY OF SUPPLY (PES)
designed by Péter Puklus for Prezi
Price Elasticity of Supply (PES)
Price Elasticity of Supply is a measure of how much the supply of a product changes when there is a change in the price of the product.
PES Formula
Example:
Suppose a construction company that supplies new houses realizes they can build & sell a home for \$290,000.00 instead of the \$250,000.00 they used to supply it for; so they increase their supply from 20 new homes to 30 per quarter. Calculate the Price Elasticity of Supply.
PES: Range of Values
When PES = 0, supply is
perfectly inelastic
Due to: spare capacity of the FOP (short run)
When PES > 1, then supply is price
elastic
e.g. toothpaste
When PES = 1, then supply is
unit elastic
Change in price leads to proportionate change in Qs
When PES < 1, then supply is price
inelastic
e.g. Concert Tickets (limited availability/supply)
When PES = infinity, supply is
perfectly elastic

Due to: an infinite amount of global supply
Wheat: endless global supply (long-run)
PES Determinants
1. How much costs rise as output increases. (Unused Capacity)
a) Existence of unused capacity
High unused capacity
Causes PES to be highly elastic
Producing at capacity
Causes PES to be relatively inelastic
b) Mobility of factors of production
Causes PES to be relatively elastic

PES: A Firm's Behavior
PES OF PRIMARY COMMODITIES
PES: Non-Linear Supply Curve
PES is more elastic at low levels of demand (D1 & D2)
PES is more inelastic at high levels of demand (D4 & D5)

During periods of high demand, suppliers spare capacity of supplies (especially commodities), are reaching supply limits, causing a slowdown in ability to increase output.
HOW DOES DEMAND AFFECT SUPPLY?
Elasticity determines how much a shift changes quantity versus price.

If D increases and S is perfectly inelastic, then price rises and quantity doesn't change.
If S increases and D is perfectly inelastic, then price falls and quantity doesn't change.
If D increases and S is perfectly elastic, then price stays the same and quantity rises.
If S increases and D is perfectly elastic, then price stays the same and quantity rises.
PES for New Housing Construction
PES DETERMINANTS
2. Time Period Considered
Short-run
PES more inelastic
A firm can change a
few
of the Q&Q of the FOP (labor, raw materials)

Long-run
PES more elastic
Can increase Q&Q of
all
FOP
PES DETERMINANTS
3. ABILITY TO STORE STOCK
PES is relatively elastic due to easy increases in release of supply of inventories (stock)
INELASTIC DEMAND
NECESSITY AS MAJOR INPUTS INTO VALUE-ADDED GOODS
HAVE FEW OR NO SUBSTITUTES (PETROLEUM, WHEAT, COPPER, COCOA BEANS, COFFEE BEANS)

PRIMARY COMMODITIES USUALLY HAVE HIGHER ELASTICITY, WHEREAS MANUFACTURED GOODS HAVE LOWER ELASTICITIES.
How is knowledge of PES important for a Firm?
PES is related to competitiveness, which can increase revenue & profit.
How can a firm improve their speed of responding to changes in the market?
Create spare capacity
Use latest technology
keep sufficient stock (inventory)
prolong shelf life of products
improve distribution system
provide worker training
locate production near to the market
Why is the supply of new housing price inelastic in the short-run?
Elasticity: ped, yed, xed & pes
So many ELASTICITIES... I can't remember all of the formulas, values & descriptions... I wish there was a table with all of them listed.
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