Price elasticity of supply

• What is price elasticity of supply and what is its formula?

  Price elasticity of supply (PES) reveals how responsive the change in quantity supplied is to a change in price.

  Formula : % change in Quantity Supplied/%change in Price
• What is the law of supply?

  • The law of supply states that when there is an increase in price (ceteris paribus), producers will increase the quantity supplied and vice versa
  • Economists are interested by how much the quantity supplied will increase
• What is the value of a completely inelastic good?

  0 -  The QS is completely unresponsive to achange in P (e.g. fixed number of seats in a theatre)
• What is the value of an inelastic good?

  0<x<1 - The %∆ in QS is less than proportionalto the %∆ in P (e.g agricultural products)
• What is the value of an elastic good?

  more than 1 - The %∆ in QS is more than proportionalto the %∆ in P (e.g t-shirts)
• What is the value of a perfectly elastic good?

  infinite - The %∆ in QS will fall to zero with any %∆ in P. However, supply is unlimited at a particular price. This is a very theoretical scenario
• What are the factors affecting PES?

  1. Mobility of the factors of production
  2. The rate at which costs of production increase
  3. Ability to store goods
  4. Spare capacity
  5. Time period
• How does mobility of factors of production affect PES?

  If producers can quickly switch their resources between products, then the PES will be more elastic. E.g. If prices of hiking boots increase and shoe manufacturers can switch resources from producing trainers to boots, then boots will be price elastic in supply
• How does the rate at which cost of production increase affect PES?

  It costs more to produce each additional unit of output (marginal cost). If the rate of the marginal cost increase is low, the quantity supplied will be more elastic. However, if marginal costs rise quickly, then the quantity supplied will be more inelastic
• How does ability to store goods affect PES?

  If products can be easily stored then PES will be higher (elastic) as producers can quickly increase supply (e.g. tinned food products). An inability to store products results in lower PES (inelastic)
• How does spare capacity affect PES?

  if prices increase for a product and there is a capacity to produce more in the factories that make those products, then supply will be elastic. If there is no spare capacity to increase production, then supply will be inelastic
• How does time period affect PES?

  In the short run, producers may find it harder to respond to an increase in prices as it takes time to produce the product (e.g. avocados). However, in the long run they can change any of their factors of production so as to produce more