PES Flashcards
Price elasticity of supply measures?
PES measures the degree of responsiveness of quantity supplied of a product due to a change in its price.
PES Formula
%change in QS ÷ % change in Price
Supply is price elastic If?
PES >1 if firms can easily increase the QS without any time delay if there’s an increase in price of the product.
Supply is price inelastic if?
PES <1 if firms find it difficult to change QS in a short period of time following a change in the market price.
Determinants of PES?
T- time- supply tends to be price inelastic in the short run as firms do not have the resources to to suddenly increase their output owing to the length of the production process.
The shorter the production time, the more price elastic supply tends to be.
I- inventory- firms with high levels of inventory tend to have relatively price elastic supply as they are able to respond quickly to a change in market price.
C- costs- if a firm can increase output with MC rising at a faster rate, supply tends to be price elastic. Because low MC, will stimulate an increase in the QS in order to max profit.
C - capacity- a firm with plenty of spare capacity and acess to raw materials can increase the QS with relative ease.
S- substitution(fop)- the easier it to substitute fop, the more price elastic supply tends to be.
Significance of PES?
Knowledge of PES can enable firms to be more responsive and competitive to changes in the market.
PES for manufactured v primary product
The price elasticity of supply for primary products is relatively low owing to the comparatively
long time it takes to increase primary sector output, such as oil, iron, coal and agricultural
harvests. By contrast, the PES for manufactured products is generally higher because many of
these can be mass produced in shorter time periods.
apply the five determinants (TICCS) of price elasticity of supply to explain PES for manufactured v primary product
