2.6

• Price Elasticity of Supply (PES)


  Reveals how responsive the change in quantity supplied is to a change in price
• Calculation of PES


  1. PES = % change in quantity supplied / % change in price

  2. % Change = (new value - old value) / old value x 100
• The PES value of 0.15 indicates that avocados are very price inelastic in supply
• Values of PES


  • 0 - Perfectly Inelastic
  • 0 to 1 - Relatively Inelastic
  • 1 to Infinity - Relatively Elastic
  • Infinity - Perfectly Elastic
• Perfectly Inelastic


  • The quantity supplied is completely unresponsive to a change in price
• Relatively Inelastic


  • The % change in quantity supplied is less than proportional to the % change in price
• Relatively Elastic


  • The % change in quantity supplied is more than proportional to the % change in price
• Perfectly Elastic


  • The % change in quantity supplied will fall to zero with any % change in price, but supply is unlimited at a particular price
• Determinants of PES


  • Mobility of the factors of production
  • The rate at which costs of production increase
  • Ability to store goods
  • Spare capacity
  • Time period
• Mobility of factors of production

  If producers can quickly switch resources, PES will be more elastic
• Rate of marginal cost increase

  If marginal costs rise quickly, quantity supplied will be more inelastic
• Ability to store goods

  If products can be easily stored, PES will be higher (elastic)
• Spare capacity


  If there is spare capacity to increase production, supply will be elastic
• Time period


  In the short run, producers may find it harder to respond to price increases, but in the long run they can change factors of production to produce more