1.2.5 Price elasticity of supply Flashcards
Price elasticity of supply (PES)
The sensitivity of supply to changes in price.
Determinants of PES
- Capacity
- Substitutability
- Storability
- Time
- Unemployment
[Determinants of PES]
How does capacity affect PES?
If capacity is fixed, supply will be less responsive to price as firms can’t expand supply easily past these upper limits.
[Determinants of PES]
How does substitutability affect PES?
If firms can easily swap one input for another, they will be more responsive to changes in price.
[Determinants of PES]
How does storability affect PES?
If the product is easy to store, firms can build up stocks of goods when prices are low and use when demand is high. – Typically more responsive to changes in price.
[Determinants of PES]
How does time affect PES?
Goods that take a long time to produce (e.g. wine/cheeses) mean that producers cannot quickly respond to changes in price.
[Determinants of PES]
How does unemployment affect PES?
During periods of unemployment, supply tends to be more elastic (it is easier to attract new workers if a firm wishes to expand).
Equation for PES
What is the PES usually?
The price elasticity of supply is usually positive because supply increases as price increases for most goods.
Elastic supply
If PES is greater than 1, supply of the good is elastic. This means a percentage change in price will cause a larger percentage change in quantity supplied.
The higher the value of PES, the more elastic supply is for the good.
Perfectly elastic supply
Perfectly elastic supply has a PES of infinity and any fall in price means that supply will fall to zero.
Graph showing perfectly price elastic supply
Inelastic supply
If PES is between 0 and 1, supply for the good is inelastic. This means a percentage change in price will cause a smaller percentage change in quantity supplied.
The smaller the value of PES, the more inelastic supply is for the good.
Perfectly inelastic supply
Perfectly inelastic supply has a PES of 0 and any change in price will have no effect on the quantity supplied. At any price, the quantity supplied will be the same.
Graph showing perfectly price inelastic supply
Unit elasticity of supply
A good has unit elasticity (PES = 1) if the size of the percentage change in quantity supplied is equal to the percentage change in price.
For example, a 50% increase in price will lead to a 50% increase in quantity supplied.
PES in the Short Run
In the short run, a firm’s capacity is fixed. Capital is often fixed in the short run – a firm can recruit more workers and buy more materials, buy it takes time to build additional production facilities. This means that it can be difficult to increase production in the short run, so supply in the short run is inelastic.
PES in the Long Run
In the long run, all the factors of production are variable – so in the long run a firm is able to increase its capacity. This means that supply is more elastic in the long run because firms have longer to react to changes in price and demand.
