1.2.5 Elasticity of supply Flashcards
Price Elasticity of Supply PES
The responsiveness of supply to a change in price of the good.
% change in quantity supplied / % change in price
PES numerical values
• Unitary elastic PES is where PES=1: quantity supplied changes by exactly the same percentage as price. This would be shown as a curve which starts in the origin, is steeper than an elastic curve but more sloping than an inelastic curve.
• Relatively elastic PES is where PES>1: quantity supplied changes by a larger percentage than price so supply is relatively responsive to price. The curve will be more sloping, starting on the price axis.
• Relatively inelastic PES is where PES<1: quantity supplied changes by a smaller percentage than price so supply is relatively unresponsive to price. The curve will be steep, starting on the quantity line axis.
• Perfectly elastic PES is where PES=infinity: a change in prices means that quantity supplied falls to 0 and supply is very responsive to price. This would be shown by a horizontal line.
• Perfectly inelastic PES is where PES=0: a change in price has no effect on output so demand is completely unresponsive to price. This would be shown by a vertical line.
Unitary elastic PES
Where PES=1: quantity supplied changes by exactly the same percentage as price.
- This would be shown as a curve which starts in the origin, is steeper than an elastic curve but more sloping than an inelastic curve.
Relatively elastic PES
Where PES>1: quantity supplied changes by a larger percentage than price so supply is relatively responsive to price.
- The curve will be more sloping, starting on the price axis
Relatively inelastic PES
Where PES<1: quantity supplied changes by a smaller percentage than price so supply is relatively unresponsive to price.
- The curve will be steep, starting on the quantity line axis
Perfectly elastic PES
Where PES=infinity: a change in prices means that quantity supplied falls to 0 and supply is very responsive to price.
- This would be shown by a horizontal line
Perfectly inelastic PES
Where PES=0: a change in price has no effect on output so supply is completely unresponsive to price.
- This would be shown by a vertical line
Factors effecting PES
Time
Stocks
Working below full capacity
Availability of factors of production
Ease of entry into the market
Availability of substitutes
Time - factors affecting PES
This will have an impact on the amount of a good that can be supplied at any price. In the immediate term, no matter how high the price is, a supplier can only sell the amount of product they have so supply is perfectly inelastic.
- in the short term, they could sell more products but will still be restricted by the FIXED factors of production, meaning it will still be relatively inelastic.
- in the long term, they can increase production and all factors are VARIABLE and therefore the supply curve will be elastic.
The longer the period of time the supplier has to make a change and increase production, the more elastic the curve will be.
Stocks - factors affecting PES
If a business has a stockpile of goods, when the price goes up, they will simply decide to use up some or all of their stockpiles and therefore supply will be more elastic.
Working below full capacity - factors affecting PES
If a business is working below full capacity (e.g. they are producing 50 goods but could produce 100) and there is an increase in price, they can easily respond by producing to their full capacity so the supply curve will be more elastic.
Availability of factors of production - factors affecting PES
For example, labour may need particular skills or training so cannot be instantly increased. If wages of a doctor rise by a large amount, it would still take years before there would be an increase in the number of doctors so it is inelastic.
Ease of entry into the market - factors affecting PES
Large costs of start-up equipment could make it difficult to increase supply, which makes it inelastic. Trade unions or professional associations can restrict entry.
Availability of substitutes - factors affecting PES
If a good has a lot of producer substitutes, it will have high elasticity. One model of car is a substitute for another model of car as producers can easily switch between the two meaning suppliers can alter the pattern of production if price rises or falls so supply will change.
Short and Long-run
- The short term is the period of time when at least one factor of production is fixed.
- The long term is when all factors of production are variable.
