2.6 Elasticity of Supply Flashcards
Price elasticity of supply (PES)
measure of how much the quantity supplied of a good changes when there is a change in its own price. PES can be calculated when there is a movement along the supply curve.
How to calculate PES
% change in quantity supplied / % change in price
When is PES inelastic and show the graph for it
0 < PES < 1
When is PES elastic and show the graph for it
1 < PED < Infinity
When is PES unit elastic and show the graph for it
PES = 1
Always passes through the origin
When is PES perfectly inelastic and show the graph for it
PES = 0
When is PES perfectly elastic and show the graph for it
PES = infinity
Determinants of PES
time period
mobility of factors of production
spare capacity
ability to store stocks
rate at which costs increase
Explain the determinants of PES of time period
Over short time firms are unable to increase or decrease any of its inputs to change the quantity it produces, therefore it is highly inelastic
As the length of time that firms have increases, it begins to become more elastic
Explain the determinants of PES of mobility of factor of production
More easily and quickly resources can be shifted out of one line of production to another, the more elastic supply is
Explain the determinants of PES of spare capacity
Firms may have capacity to produce that is not being used e.x unused factories , if this occurs supply is elastic
If capacity is full and there is no spare capacity, supply will be more inelastic
Explain the determinants of PES of ability to store stocks
if firms are able to store high levels of stock/inventory, then reserves of products can be used, and more can be produced as they have the ability to store the product, leading to price elastic supply
Explain the determinants of PES of rate at which costs increase
If costs of producing extra output increase rapidly, supply will be inelastic as firms will have difficulty expanding their output as they do not want to incur large costs
If costs increase slowly, it is easier from firms to expand output, supply is elastic
Why is PES lower for primary commodities then manufactured products
a
Commodities have inelastic supply as it is often difficult to adjust supplies/production methods to take advantage of price increases – e.g, if demand for cocoa rose, then it would be difficult to increase supply of cocoa in the short–term as it takes time to grow the cocoa.
Manufactured Products tend to have elastic supply as it is easier to adjust their supply.
