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Price Elasticity of Supply

Unit 3 - Lesson 6

Learning outcomes:
Explain the concept of PES
Calculate PES
Explain using diagrams the concepts of elastic,
inelastic, unit elastic, perfectly elastic/inelastic
supply.
Explain the determinants of PES.
Explain PES for primary commodities is relatively
low & manufactured goods relatively high.

Price Elasticity of Supply - PES


Measure of the responsiveness of
producer of a particular good to a
change in the price of that good.
PES = % change in Quantity Supplied
% change in Price

Elastic & Inelastic Supply


Inelastic Supply:
% change in Price
>
% change in Quantity Supplied

Elastic Supply:
% change in Price
<
% change in Quantity Supplied

More...
Elastic Supply: Producers a more sensitive to
changes in price. Flatter supply curve.

Inelastic Supply: Producers are less sensitive


to changes in price. Steeper supply curve.

Special cases:
Perfectly Elastic Supply:
Producers are infinitely responsive to
changes in price.

Perfectly Inelastic Supply:


Producers are not responsive to
changes in price.

Unit Elasticity of Supply:


% change in price = % change in
Quantity Supplied.

Determinants of PES
1.
2.
3.
4.

Amount of time following a change in Price.


Mobility of Factors of Production.
Ability to store stock.
Amount of unused capacity.

Time following change in price:


Market Period: Period immediately following a
change in price.
1. Highly inelastic.
2. Producers do not have time to adjust their
quantity supplied.
3. The amount of factors of production are fixed
in the market period.

Time following a price change:


Short-run: period of time immediately
following the market period. Usually around 3months.
1. Output can be increased.
2. Increase their factors of production.
3. Supply becomes more elastic. Producers
are able to respond to the change in price.

Time following a price change:


Long-run: Period of time when all factors of
production are variable. Not a specific period of
time.
1. Highly elastic Supply.
2. Producers are able to change all factors of
production in order to maximize supply.
3. Over time, producers are much more
responsive to changes in price.

Mobility of the Factors of Production


More mobile the Factors of Production: More
responsive a firm can be to a change in price.
More elastic.
Examples:
Low tech manufactured: clothes, toys, basic
electronics.
Low-skilled services: hairdresser, housekeeper

Mobility of Factors of Production


Less mobile the Factors of Production:
Producers are not able to price changes
quickly. More inelastic the supply.
Examples:
Airplanes, Construction, Doctors
Primary commodities: land-intensive in
production tend to be highly inelastic.

Ability to store stocks


Large inventories can be stored in a warehouse,
the more elastic the supply. Producers are able to
easily respond to a change in price.
Perishable goods/large scale industrial goods are
not able to be stored so supply is more inelastic.
Producers are not able to respond to a change in
price.

Amount of unused capacity


Excess Capacity: the amount of output an industry
can produce in the short-run (all factors of production
fixed) without having to expand its plant size.
Large excess capacity: Producers are highly
responsive to price changes. Highly elastic.
Little excess capacity: Producers are not highly
responsive to price changes. Highly inelastic.