Price Elasticity of Supply (PES)

Question 1

Price elasticity of supply

Answer 1

The responsiveness of quantity supplied to a change in price

Question 2

Inelastic PES

Answer 2

When quantity supplied changes less than proportionately to a change in price
- 0 < PES < 1

Question 3

Elastic PES

Answer 3

When quantity supplied changes more than proportionally to a change in price
- PES > 1

Question 4

Determinants of PES

Answer 4

1. Availability of factors of production
- if lots of fop = supply curve is elastic so when prices go up, supplied goes up more than proportionally
- if small amounts of fop = supply curve is inelastic so when prices go up supply goes up less than proportionally
- during a recession there is a lot more spare capacity (inside ppf) so if prices go up they can easily use these fop to supply more
- if the price of a related good goes up then you can switch fop to that good

2. Availability of stock
- if you have a lot of stock then when prices go up you can easily sell the good or service
- can meet demand quicker

3. Time period
- overtime, PES becomes more elastic as can get more stock and fop
- Technology has improved so can increase storage and keep stock for longer
- capital has increased an improved so can produce more supply
- labor becomes more occupationally mobile and education has improved so more skilled workers

Question 5

Evaluation of determinants of PES

Answer 5

1. Availability of factors of production
- depends upon industry in question
- if more skilled labor required then it is more inelastic
- the more capital the more elastic the supply Curve
- depends on government policy such as improving infrastructure to increase geographical mobility of workers
- increase education and training
- relaxed labor laws so there’s more immigration
- depends on economic cycle as if in a boom there is full capacity

2. Availability of stock
- improvements in technology allows perishable goods to last longer
- globalisation meaning it is easier to get natural resources from other countries
- depends on the industry
- consumer trends and preferences change a lot

3. Time period
- over time may not become more elastic
- depends upon industry and what extent there is an abundance of supply as resources are limited if using scarce commodities
- in some Industries supply are always more advanced
- have to spend more time on research and development

Question 6

PES is useful

Answer 6

1. Inelastic Supply
- when there is an increase in demand and there is inelastic supply then price is go up more than proportionally than demand
- if a firm has a inelastic supply curve, they should increase their fop and stock levels as it is more profitable to supply when prices are high
- to increase labour quickly they can introduce 0 hour contracts
- might encourages customers to buy now as they know if supply curve is inelastic and firms don’t have a lot of fop or stock so product will run out quickly

2. Elastic Supply
- when demand increases and supplies elastic you can easily increase profits as can easily sell a lot more at higher prices
- quantity demanded increases more than proportionally to a change in price
- can steal market share as can easily meet demand and increase brand loyalty
- elastic supply curve mean consumers can plan their expenditure as they know prices won’t increase as much and so more likely to buy

Question 7

PES is not useful

Answer 7

1. Only valid for marginal price changes
- work on a marginal price
- prices go up incrementally
- if price is go up by a lot they were just produce more

2. Estimates
- could misinform firms and they could increase fop and stock level alot which waste money and capital depreciate over time

3. May be outdated
- PES for firms now is more elastic due to globalisation
- can get workers and machinery from abroad

4. Ceteris parabus may not hold
- exogenous shocks which may destroy factors of production and stocks or impacts PES and becomes inelastic
- country you import fop from could stop supplying
- depends where on economic cycle
- should look at YED as depends on incomes if demand will increase and if need to increase supply

5. Difficult for firms to predict future changes in demand
- exogenous shocks
- economic cycle is volatile
- changes in preferences and trends
- changes in income and consumers may choose to save

6. Elasticity of supply curve changes over time
- all the time becomes more elastic as access to technology and globalization
- more people are educated so more skilled labor
- could become more inelastic if working in an industry that has scarce resources or industry that is prone to exogenous shocks

7. Depends on PES relative to PES of other competing firms in the industry
- If another firm has more elastic supply so when demand increases they can supply more and still more market share

8. Other factors that impact profitability
- quality
- consumer trends and preferences may change
- advertisement
- whether people have effective demand