price elasticity of supply - wikispacesdcszeconomics.wikispaces.com/file/view/price... · price...

Price Elasticity of Supply

IGCSE Economics

Price Elasticity of Supply

• Price elasticity of supply (PES) measures the relationship between change in quantity supplied and a change in price. – (1) When supply is elastic, producers can increase

production without a rise in cost or a time delay

– (2) When supply is inelastic, firms find it hard to change their production levels in a given time period.

Measuring Price Elasticity of Supply

• The formula for price elasticity of supply is: – Percentage change in

quantity supplied divided by the Percentage change in price

• The co-efficient of elasticity of supply is positive, because an increase in price is likely to increase the quantity supplied to the market

Price Elasticity of Supply - Measurement

ES = % change in quantity supplied % change in price

ES > 1 price-elastic supply

ES = 1 unit-elastic supply

ES < 1 price-inelastic supply

Es = 0 perfectly inelastic supply

Es = infinity perfectly elastic supply

What Determines Supply Elasticity?

• Factor substitution possibilities – Can labour or capital inputs be switched easily when

there is a change in demand? • When factor substitution is possible and can be

achieved at low cost, supply will be elastic • When factors are highly specialized, substitution may

be harder and thus supply will be inelastic

• Spare production capacity available – When there is spare capacity, businesses can expand

output easily to meet rising demand without upward pressure on costs

What Determines Supply Elasticity (2)

• Stocks (inventories) of finished products and raw materials available to meet demand – A low level of stocks makes supply inelastic in the short term

– When stocks can be released onto the market, supply is elastic

• The time frame allowed – Momentary period (fixed supply)

– Short run (inelastic supply)

– Long run (elastic supply)

• Artificial limits on supply – E.g. the impact of patents that limit which firms can supply a

product

Using the idea of elasticity of supply

What will determine the elasticity of supply of iPods and iPod nanos?

What about the elasticity of supply of tunes downloaded from iTunes?

Applying the idea of Elasticity of Supply

Applying The Concept

• Seats in a football stadium / theatre / cinema – Short run capacity of any stadium is more or less

fixed

– Long run – allows for the expansion of stadium capacity / development of a new ground

• An increase in demand for fresh salmon – Time lags in the production process – e.g. a fixed

supply available to the market in momentary period (i.e. the daily fish catch)

– Longer term; change in the number of vessels, length of time at sea

Oil and elasticity of supply

• World supply of oil following a large rise in world demand – Variable amount of spare

capacity among the major oil producers

– Can oil stocks be put onto the market to meet the rise in demand?

– Oil supply might be inelastic if current output is close to capacity

Elasticity of supply of new housing

• The supply of new housing – Planning permission

+ availability of land to develop + shortages of skilled labour

– Time lags in the production process – new housing developments take months to complete

Momentary Supply – Price Elasticity = Zero

Quantity Supplied (Qs)

Price (P)



Price (P)

Momentary Supply

Q1



Price (P)

Momentary Supply

P1

Q1

D1



Price (P)

Momentary Supply

P1

Q1

D1

D2

P1



Price (P)

Momentary Supply

P1

Q1

D1

D2

P1

Increase in price from P1 to P2 does not lead to a change in supply

Short Run Supply


Price (P)

Momentary Supply

P1

Q1

D1

D2

P2

Short Run Supply

Short Run Supply


Price (P)

Momentary Supply

P1

Q1

D1

D2

P2

Short Run Supply

Q2

P3

Short Run Supply


Price (P)

Momentary Supply

P1

Q1

D1

D2

P2

Short Run Supply

Q2

Increase in price from P1 to P2 does lead to a short term expansion in supply P3

Long Run Supply Response


Price (P)

Momentary Supply

P1

Q1

D1

D2

P2

Short Run Supply

Q2

Long Run Supply P3

Long Run Supply Response


Price (P)

Momentary Supply

P1

Q1

D1

D2

P1

Short Run Supply

Q2

Long Run Supply

Q3

P3

Long Term Response to rising Demand


Price (P)

Demand

Short Run Supply

P2

P1

Q1 Q2

Long Run Supply

D2

P3

Q3

Longer time frame – supply is more elastic – larger rise in output if price P2 is sustained

Long Term Response to rising demand


Price (P)

Demand

Short Run Supply

P2

P1

Q1 Q2

Long Run Supply

D2

P3

Q3

Longer time frame – supply is more elastic – larger rise in output if price P2 is sustained

Values for price elasticity of supply

• When supply is perfectly inelastic a change in price has no effect on the quantity supplied onto the market

• When supply is perfectly elastic a firm can supply any quantity at the same market price. This occurs when the firm can produce output at a constant cost per unit and it has no capacity limits to its production

• When supply is relatively inelastic a change in demand affects price more than quantity supplied

• When supply is relatively elastic. A change in demand can be met without a change in market price

Differences in Price Elasticity of Supply

Price

Quantity

Price

Quantity Price

Quantity

Price

Quantity

Inelastic Supply Curve

Perfectly elastic supply An elastic supply curve

Perfectly inelastic supply

Elasticity of supply & changes in demand

Price

Relatively Elastic Supply Supply responds quickly to a

change in demand Relatively Inelastic Supply Supply responds less than

proportionately to a change in price

Supply

Supply

Quantity Quantity Q1 Q2 Q3

P1 P1

P2

P3

Q1 D3 D2 D1

P2 P3

D3 D2 D1

Supply elasticity

Migrant workers can help to relieve shortages of labour and improve the elasticity of supply

In many agricultural markets, the delay between planting and harvesting makes supply very inelastic in the momentary period

price elasticity of supply - wikispacesdcszeconomics.wikispaces.com/file/view/price... · price...

Documents