3.4

• Price elasticity of supply definition

  A measure of the percentage or proportionate change in the quantity supplied resulting from a given percentage or proportionate change in the price of that good
• price elasticity of supply (PES) formula

  $\frac{\%\ change\ in\ quantity\ \sup pled\ }{\%\ change\ in\ price}$
• what factors influence PES?

  • time (more elastic in the long run)
  • space capacity
  • stock levels
  • ease of switching production
  • mobility of factors of production
  • production time
• what does PES > 1 or < 1 mean?

  • PES > 1 = elastic (supply responds strongly to price changes)
  • PES < 1 = inelastic (hard to change supply quickly)
  • PES = 0 = unitary elastic
• why is PES important for firms and policymakers ?

  • helps firms plan production in response to price changes
  • helps governments predict the impact of taxes/subsidies
  • influences how quickly markets respond to demand shifts
• what is the short-run and long-run in supply?

  • short-run: at least one factor of production is fixed (less elastic supply)
  • long-run: all factors are variable, so firms can expand more easily (more elastic supply)
• How does time affect PES?

  • in the short-run, supply is often inelastic because producers can’t easily change inputs
  • In the long-run, supply becomes more elastic as firms can expand capacity
• how does spare capacity affect PES?

  firms with spare resources (labour, machines, materials) can increase supply quickly - more elastic supply
• how does stock levels affect PES?

  • if firms have high stock or inventory, they can quickly meet extra demand - elastic supply
  • lower stock = slower response - inelastic supply
• how does production time influence PES?

  goods that take longer to producer tend to have more inelastic supply in the short term
• how does the ease of factor mobility affect PES?

  if factors of production (like labour or capital) can be easily moved between industries, supply is more elastic
• how does the level of regulation or barriers to entry affect PES?

  strict regulations or barriers (e.g licenses, zoning laws) can limit how quickly firms respond to price changes helps- inelastic supply
• how does the availability of raw materials affect PES?

  if raw materials are easily available, firms can respond to higher prices more easily - elastic supply
• what kind of goods tend to have inelastic supply ?

  • perishable goods (e.g crops and agriculture)
  • goods requiring long production times (e.g buildings)
  • niche, specialist items
• what kind of goods tend to have elastic supply?

  • mass-produced items
  • non-perishables with high stock
  • goods made with flexible, mobile resources