Price Elasticity of Supply

Price Elasticity of Supply

Price elasticity of supply (Pes) measures the relationship between change in quantity supplied and a change in price. (1) When supply is elastic, producers can increase production without a rise in cost or a time delay (2) When supply is inelastic, firms find it hard to change their production levels in a given time period.

Measuring Price Elasticity of Supply

The formula for price elasticity of supply is: Percentage change in quantity supplied

by the Percentage change in price

The co-efficient of elasticity of supply is positive, because an increase in price is likely to increase the quantity supplied to the market.

Price Elasticity of Supply - Measurement

ES = ES > 1 ES = 1 ES < 1 Es = 0 % change in quantity supplied % change in price price-elastic supply unit-elastic supply price-inelastic supply perfectly inelastic supply

Es = infinity perfectly elastic supply

Differences in Price Elasticity of Supply

Price Perfectly elastic supply Price An elastic supply curve

Quantity Price Perfectly inelastic supply Price

Quantity Inelastic Supply Curve

Quantity

Quantity

Values for price elasticity of supply

When supply is perfectly inelastic a change in price has no effect on the quantity supplied onto the market When supply is perfectly elastic a firm can supply any quantity at the same market price. This occurs when the firm can produce output at a constant cost per unit and it has no capacity limits to its production. When supply is relatively inelastic, a change in demand affects price more than quantity supplied When supply is relatively elastic, a change in demand can be met without a change in market price

Hints on looking at PeS curves -the linear If the supply curve intersects
price axis the curve is ELASTIC
If the supply curve passes through the origin (0) the curve is UNITARY

If the supply curve intersects the quantity axis the curve is INELASTIC

Calculations to do
1. The price of a product falls from 60p to 40p causing supply to contract from 120 to 100. 2. The price of a product falls from $45 to $40. As a result supply falls from 6000 to 5000. 3. The price of a product rises from 50 to 60 causing supply to extend from 100 to 200. 4. A products price rises from 12 to 13 but supply remains unchanged at 2000. 5. Supply extends from 900 to 1200 because of a rise in price from 10 to 11.

What Determines Supply Elasticity?

Factor substitution possibilities Can labour or capital inputs be switched easily when there is a change in demand? When factor substitution is possible and can be achieved at low cost, supply will be elastic When factors are highly specialized, substitution may be harder and thus supply will be inelastic Spare production capacity available When there is spare capacity, businesses can expand output easily to meet rising demand without upward pressure on costs

What Determines Supply Elasticity (2)

Stocks (inventories) available to meet demand A low level of stocks makes supply inelastic in the short term When stocks can be released onto the market, supply is elastic The time frame allowed Momentary period (fixed supply) Short run (inelastic supply) Long run (elastic supply) Artificial limits on supply E.g. the impact of patents that limit which firms can supply a product

Decide on the PeS

Football stadium Fresh salmon oil

Reminder:
PeS shows whether firms can respond to a rise in price by increasing their supply Elastic = easy to increase Supply without cost and time issues. Inelastic = harder to change supply

Flu jabs

New houses

Applying The Concept

Seats in a football stadium / theatre / cinema Short run capacity of any stadium is more or less fixed Long run allows for the expansion of stadium capacity / development of a new ground An increase in demand for fresh salmon Time lags in the production process e.g. a fixed supply available to the market in momentary period (i.e. the daily fish catch) Longer term; change in the number of vessels, length of time at sea

Oil and elasticity of supply

World supply of oil following a large rise in world demand Variable amount of spare capacity among the major oil producers Can oil stocks be put onto the market to meet the rise in demand? Oil supply might be inelastic if current output is close to capacity

Elasticity of supply of new housing

The supply of new housing Planning permission + availability of land to develop + shortages of skilled labour Time lags in the production process new housing developments take months to complete

Elasticity of supply of drugs

Short term supply is dependent on stocks of product available If stocks are low, supply cannot increase in the short term to meet demand Debate over the use of patents and how this limits production in the long run

Decide in each of the following cases whether supply is likely to be elastic or inelastic
Beef Paper clips Fresh strawberries Jeans Tinned peas Aeroplanes

And then draw a PeS diagram.