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# Price elasticity supply

PeS
Published on: Mar 4, 2016
Published in: Education

#### Transcripts - Price elasticity supply

• 1. Price Elasticity of Supply EdExcel Economics 1.2.5
• 2. Defining and Measuring Price Elasticity of Supply • If supply is elastic, producers can increase their output without a rise in cost or a time delay • If supply is inelastic, firms find it hard to change their production in a given time period • The formula for price elasticity of supply is: • % change in quantity supplied divided by the % change in price • When Pes > 1, then supply is price elastic • When Pes < 1, then supply is price inelastic • When Pes = 0, supply is perfectly inelastic • When Pes = infinity, supply is perfectly elastic following a change in demand Price elasticity of supply (Pes) measures the relationship between change in quantity supplied and a change in price
• 3. Factors Affecting Price Elasticity of Supply 1. Spare production capacity: If there is plenty of spare capacity then a business can increase output without a rise in costs and supply will be elastic in response to a change in demand 2. Stocks of finished products and components: If stocks of raw materials and finished products are at a high level then a firm is able to respond to a change in demand - supply will be elastic. Perishable goods are often harder/more expensive to store 3. Ease and cost of factor substitution/factor mobility: If capital and labour are occupationally mobile then the elasticity of supply for a product is likely to be higher as resources can be mobilized to supply the extra output e.g. the reallocation of workers to new tasks 4. Time period and production speed: Supply is more price elastic the longer the time that a firm is allowed to adjust its production levels Apply each of the factors mentioned below to the specific industry
• 4. Elastic and Inelastic Supply Curves Elastic supply: Pes > 1 Change in demand can be met without large rise in price Price Qty P2 P1 Q1 Q2 Price Qty P2 P1 Q1 Q2 S1 Inelastic supply: Pes < 1 Supply relatively unresponsive to a change in demand S2 Q2 D1 D2 D1 D2
• 5. Perfectly Elastic and Perfectly Inelastic Supply Curves Perfectly Elastic Supply An increase in demand can be met without any change in market price Price Qty P2 P1 Q1 Price Qty P1 Q1 Q2 S1 Perfectly Inelastic Supply Supply is fixed and cannot respond to a change in market demand S1 D1 D2 D1 D2
• 6. When will market supply be price elastic? A price elastic supply is when PES >1 following a change in demand Supplier has plenty of spare capacity to increase output High stock levels are available to meet rising demand There is a short production time frame to get extra products to market Ease of factor substitution is high – i.e. resources can be reallocated easily
• 7. Topical Applications of Price Elasticity of Supply Shortages of skilled workers in the labour force Supplying complex products with rising consumer demand The supply of new housing to buy and to rent (big UK issue!) Supply response of renewable energy Elasticity of supply of commodities Refining capacity in the oil and gas industries
• 8. Price Elasticity of Supply EdExcel Economics 1.2.5