Ch9 - price elasticity of supply

• Price elasticity of supply

  The responsiveness of supply to a change in price
• Inelastic supply (price inelastic)

  • Change in price results in a proportionately smaller change in the quantity supplied
• Inelastic supply

  • Many agricultural goods because farmers cannot increase supply at a short notice. It takes time to grow farm produce.
• Elastic supply (price elastic)

  • Change in price result in a greater change in the quantity supplied
• Inelastic supply

  Value of PES is less than 1, supply curve is steep
• Elastic supply

  Value of PES is greater than 1, supply curve is flatter
• Perfectly inelastic supply

  Value of PES is zero, supply curve is vertical, price change will not affect quantity supplied
• Perfectly inelastic supply

  • Supply of tickets to a tennis match because the capacity of the stadium was fixed
• Perfectly elastic supply

  Value of PES is equal to infinity, supply curve is horizontal, producers are prepared to supply any amount at a given price
• Unitary elasticity of supply

  Value of PES is exactly 1, percentage change in price is always the same as the percentage change in quantity supplied
• PES is influenced by whether producers can increase supply easily
• Factors affecting price elasticity of supply

  • Factors of production
  • Availability of stocks
  • Time
  • Spare capacity
• Factors of production

  • If producers have easy access, supply will be elastic
  • If production factors are mobile, supply will be elastic
• Availability of stocks

  • If producers can hold stocks, supply will be elastic
  • If it is impossible or expensive to hold stock, supply will be inelastic
• Perishable goods

  • Supply will be inelastic because they cannot be stored for very long
• Time

  • The more time producers have to react to price changes, the more elastic supply
  • Where it is not possible to increase supply quickly due to production limitation, supply will be inelastic
• Spare capacity

  • If producers have spare capacity, supply will be more elastic
  • If producers are running at full capacity, supply will be inelastic