role of the market

• Factors influencing Price Elasticity of Supply (PES)

  • Time scale
  • Spare capacity
  • Level of stocks
  • How substitutable factors are
  • Barriers to entry to the market
• Time scale


  1. In the short run, supply is more price inelastic, because producers cannot quickly increase supply

  2. In the long run, supply becomes more price elastic
• Spare capacity


  • If the firm is operating at full capacity, there is no space left to increase supply
  • If there are spare resources, for example in a recession there are lots of spare and unemployed resources, supply can be increased quickly
• Level of stocks


  • If goods can be stored, such as CDs, firms can stock them and increase market supply easily
  • If the goods are perishable, such as apples, firms cannot stock them for long so supply is more inelastic
• How substitutable factors are

  • If labour and capital are mobile, supply is more price elastic because resources can be allocated to where extra supply is needed
  • For example, if workers have transferable skills, they can be reallocated to produce a different good and increase the supply of it
• Barriers to entry to the market

  Higher barriers to entry means supply is more price inelastic, because it is difficult for new firms to enter and supply the market