4.1.3.4 Price elasticity of supply Flashcards
Price Elasticity of Supply
The responsiveness of quantity supplied as a result of a change in price.
PES equation
% change in quantity supplied / % change in price
What is the difference between PED, YED, XED compared with PES
PES is about how the firms react and respond but PED, YED and XED are about how consumers behave.
If PES is 0
Supply is perfectly inelastic
If PES is less than 1
The good is price inelastic.
The percentage change in supply is less than the percentage change in price of the good.
If PES is 1
Unitary
If PES is more than 1
Price elastic
If PES is infinite
The good is perfectly elastic
An increase in price completely reduces all supply.
Factors affecting PES:
Length of Production Process
Availability of spare capacity Inventory and accumulation of stocks
Ease of switching between alternative methods of production
Factor substitution
Number of firms in the market
Barriers to entry
Time
Factors affecting PES: Length of Production Process
If the length is long then it takes more times to respond so is inelastic such as building houses.
Factors affecting PES: Availability of spare capacity
If firms have factors of production that are not being used e.g. machinery, workers
Easier to increase supply in response to a change in price
Long run = all factors of production are flexible.
Factors affecting PES: Inventory and accumulation of stocks
firms with stock or finished or partly finished goods will be able to respond relatively quickly to a price increase, thus supply will tend to be more price elastic
Factors affecting PES: Ease of switching between alternative methods of production
If factor inputs are flexible, it is easier for a firm to change production of its product e.g. from producing red to blue paint
However, if a firm has highly specialised equipment and employees, supply will tend to be relatively price inelastic
Factors affecting PES: Factor substitution
When labour or raw materials can be used for lots of things. They are substitutes for the same product. If the raw material has lots of substitutes then its easier to find so more elastic.
Factors affecting PES: Number of firms in the market
If only one firm is in the market then supply is more inelastic as only they have to respond
Factors affecting PES: Barriers to entry
if easy to enter more firms in market, so more firms can supply more so increase elasticity
Factors affecting PES: Time:
In an immediate time frame no FOP are variable so inelastic as cannot respond straight away.
In the short term 1 FOP is variable, usually labour so PES is more elastic but still inelastic
In the long terms its elastic as all FOP are variable
Should a firm be highly responsive?
Yes, because it makes the firm more competitive than its rivals and allows the firm to generate more revenue and profits.
10 examples of improving PES
- Creating spare capacity
- Using the latest technology
- Keeping sufficient stocks
- Developing better storage systems
- Prolonging the shelf life of products
- Developing better distribution centres
- Having flexible workers who can do a range of jobs
- Provide training for workers
- Locating production near to the market
- Allowing inward migration of labour if there is a labour shortage
what value will the price elasticity of supply always have
a positive value
what is the value of price inelastic supply?
a value which is greater than zero and less than one
what is the value of price elastic supply?
Greater than 1
what is the value of unitary elastic supply?
One
perfectly inesaltic supply value
Zero
perfectly elastic supply value
Infinity
