1.2.5 Elasticities of Supply

• The price elasticity of supply Is the responsiveness to a change in supply after a change in price.
• PES = % Change in QS / % Change in P
• if supply is elastic, firms can increase supply quickly at little cost.

  PES = >1
• If supply is inelastic, an increase in supply can be expensive and time consuming.

  PES =<1
• Perfectly inelastic supply PES = 0
• If there is perfectly inelastic supply, supply is fixed so if there is a change in demand it cannot be met easily.
• Perfectly elastic supply PES = infinity
• Factors influencing PES (PSSST)

  P = Production lag

  S = Stock

  S = Substitute

  S = Spare Capacity

  T = Time
• Price and quality equilibrium is when supply meets demand.

  
• At market equilibrium, price has no tendency to change, known as the market clearing price.
• Joint supply is when increasing the supply of one good causes an increase or decrease in the supply of another good.
• Excess supply occurs when the price is above P1.