2.6 PES Flashcards
PES
the measure of the responsiveness of the quantity of a good supplied to changes in its price
values of PES
0 < PES < ∞
0 < PES < 1 → inelastic
1 < PES < ∞ → elastic
calculation of PES
PES = % change in quantity supplied / % change in price
determinants of PES
Length of time (short run vs long run)
- PES increase as time increase
- Spare capacity of firms
- Ability to store stocks
- Mobility of factors of production
- ease and speed the firms can shift resources and production between products
Consequence of low PES for primary commodities (e.g. farmers)
Changes in demand greatly affect the revenue = farmers have unstable incomes
Possible actions to improve the response to price change [4]
1) investing in extra capacity (e.g. more factories)
2) increasing storage to keep stock
3) investing in new equipment, procedures and workers
4) training workers to become more mobile (able to take a wider variety of tasks)
elastic or inelastic: you are a fisherman who just came back from a fishing trip. you discover the market price for fish has dropped 50%. to what extent can you supply less to the market for now? why?
fish inelastic
- perishable
- cannot control supply
- determinant: ability to store stocks
elastic or inelastic: you are a farmer of bananas, and halfway through the season, you discover the price of bananas has increased 100%. can you increase your output? why?
inelastic
- determinant: length of time
- cannot increase output → bananas take time to grow
elastic or inelastic: you are a toy factory owner, workers are all working overtime already. the price for toys increase 30%. can you increase your supply? why?
inelastic
- exploit/overstretch resources
- if new technology (e.g. machinery) → need time to set up → until then cannot change supply
- determinant: spare capacity of firms
