Chap9

• Price Elasticity of Supply (PES)


  • The responsiveness of supply to a change in price
• Antiques


  • Supply cannot be increased as they cannot be reproduced
• Producers


  • If not running at full capacity, resources needed to step up production should be freely available and they could increase supply at short notice
• Cornflake producers


  • If they hold large stocks of cornflakes, they would be able to increase supply to customers at very short notice
• When the price rises, the quantity supplied will increase sharply for some goods but hardly at all for others
• PES is the responsiveness of supply to a change in price
• PES formula


  % change in Quantity Supplied / % change in Price
• Supply curve for product A

  • Steep -> inelastic
• Supply curve for product B

  • Flatter -> elastic
• Inelastic supply


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


  • Houses, agricultural products
• Elastic supply


  Change in price results in a proportionately greater change in the quantity supplied
• Elastic supply


  • Many manufactured goods like crisps
• PES =0


  Perfectly inelastic - quantity supplied is fixed and cannot be adjusted irrespective of the price
• PES=∞


  Perfectly elastic - producers will supply an infinite amount at given price
• PES = 1


  Unitary elasticity - a change in price will be matched by an identical change in quantity supplied
• PES is influenced by whether producers can increase supply easily (elastic) or not (inelastic)
• Factors of production


  • If producers have easy access, supply will be more elastic

  If factors are mobile, supply will be more elastic

  If specialised resources are needed, supply will be more inelastic
• Availability of stocks


  • Large stocks -> supply more elastic

  Perishable goods -> supply more inelastic
• Spare capacity


  • Spare capacity -> ability to produce more with existing resources -> supply more elastic

  Running at full capacity -> supply more inelastic
• Time


  • Short term -> supply more inelastic

  Long term -> supply more elastic