Price Elasticity of Supply

Question 1

Price Elasticity of Supply shows how Supply Changes with Price

Answer 1

1. Price Elasticity of supply (PES) is a measure of how the quantity supplied of a good responds to a change in its price
2. PES can be calculated using the following formula:
   PES = percentage change in quantity supplied/ percentage change in price
3. LOOK AT EXAMPLE ON PAGE 24
4. PES is generally positive since the higher the price the greater the supply

Question 2

PES can be Elastic, Inelastic or Unit Elastic

Answer 2

Elastic

1. If the value of the 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
2. The higher the value of the PES, the more elastic supply is for the good.
3. In diagram 1 (pg 24) the price increases from £5 to £7 and an extra 7 units are supplied which gives an elastic supply PES of 8.75
4. Perfectly elastic supply has a PES of +_ infinity and any fall in price means that the quantity supplied will be reduced to zero (diagram 2)

Inelastic

1. The value of PES for an inelastic good is between 0 and 1. This means a percentage change in price will cause a smaller percentage change in quantity supplied. The smaller the value of the PES, the more inelastic the supply is.
2. In diagram 3, price increases from £2000 to £6000 and only an extra 2000 units are supplied. This gives an inelastic PES of 0.5 which means for every 1% change in price there is a 0.5% change in supply.
3. Perfectly inelastic supply has a PES of 0 and any change in price will have no effet on the quantity supplied (diagram 4) at any price, the quantity supplied will be the same.

Unit Elasticity of supply: PES =1

1. A good has unit elasticity if the percentage change in quantity supplied is equal to the percentage change in price (diagram 5)
2. Foe example, a 50% increase in price will => a 50% increase in quantity supplied

Question 3

A high PES is Important to Firms

Answer 3

1. Firms aim to respond quickly to changes in price and demand.
2. To do so they need to make their supply as elastic as possible (responsive to price change)
3. Measures undertaken to improve elasticity of supply include flexible working patterns, using the latest technology and having spare production capacity. E.g. a firm has spare production capacity it can quickly increase supply of a good without an increase in costs (e.g. the cost of building a new factory).

Question 4

Supply is Price Inelastic in the Short Run

Answer 4

Over short periods of time firms can find it difficult to switch production from one good to another. This means that supply is likely to be more price inelastic in the short run compared to the long run.

Short run:

• Short run is the time period when the firms capacity is fixed, and at least one factor of production is fixed.
• Capital is often the factor of production thats fixed in the short run - a firm can recruit more workers and buy more materials, but 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

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.

The distinction between long run and short run varies with different industries because production times and levels of capital equipment vary between industries. E.g. the long run for a firm that makes sandwiches will be a shorter time than that of a firm that builds ships - to change production levels in ship building requires more capital equipment, more planning etc. Because ships take longer to produce than sandwiches, the supply of ships is more inelastic.

Question 5

There are Several Other Factors that affect PES

Answer 5

1. During periods of unemployment supply tends to be more elastic - it’s easy to attract new workers if a firm wishes to expand
2. Perishable goods have an inelastic supply as they cannot be stored for very long
3. Firms with high stock levels often have elastic supply - they’re able to increase supply quickly if they want to.
4. Industries with more mobile factors of production tend to have more elastic supply. For example, industries that employ lots of unskilled workers may find it easy to increase their labour force