Price Elasticity

1. Price
Elas+city
of
Supply
EdExcel
Economics
1.2.5

2. Defining
and
Measuring
Price
Elas+city
of
Supply
• If
supply
is
elas+c,
producers
can
increase
their
output
without
a
rise
in
cost
or
a
<me
delay
• If
supply
is
inelas+c,
firms
find
it
hard
to
change
their
produc<on
in
a
given
<me
period
• The
formula
for
price
elas<city
of
supply
is:
• %
change
in
quan,ty
supplied
divided
by
the
%
change
in
price
• When
Pes
>
1,
then
supply
is
price
elas<c
• When
Pes
<
1,
then
supply
is
price
inelas<c
• When
Pes
=
0,
supply
is
perfectly
inelas<c
• When
Pes
=
infinity,
supply
is
perfectly
elas<c
following
a
change
in
demand
Price
elas<city
of
supply
(Pes)
measures
the
rela<onship
between
change
in
quan<ty
supplied
and
a
change
in
price

3. Factors
Affec+ng
Price
Elas+city
of
Supply
1. Spare
produc+on
capacity:
If
there
is
plenty
of
spare
capacity
then
a
business
can
increase
output
without
a
rise
in
costs
and
supply
will
be
elas<c
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
elas<c.
Perishable
goods
are
oNen
harder/more
expensive
to
store
3. Ease
and
cost
of
factor
subs+tu+on/factor
mobility:
If
capital
and
labour
are
occupa<onally
mobile
then
the
elas<city
of
supply
for
a
product
is
likely
to
be
higher
as
resources
can
be
mobilized
to
supply
the
extra
output
e.g.
the
realloca<on
of
workers
to
new
tasks
4. Time
period
and
produc+on
speed:
Supply
is
more
price
elas<c
the
longer
the
<me
that
a
firm
is
allowed
to
adjust
its
produc<on
levels
Apply
each
of
the
factors
men<oned
below
to
the
specific
industry

4. Elas+c
and
Inelas+c
Supply
Curves
Elas<c
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
Inelas<c
supply:
Pes
<
1
Supply
rela<vely
unresponsive
to
a
change
in
demand
S2
Q2
D1
D2
D1
D2

5. Perfectly
Elas+c
and
Perfectly
Inelas+c
Supply
Curves
Perfectly
Elas<c
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
Inelas<c
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
elas+c?
A
price
elas<c
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
produc<on
<me
frame
to
get
extra
products
to
market
Ease
of
factor
subs<tu<on
is
high
–
i.e.
resources
can
be
reallocated
easily

7. Topical
Applica+ons
of
Price
Elas+city
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
Elas<city
of
supply
of
commodi<es
Refining
capacity
in
the
oil
and
gas
industries

8. Price
Elas+city
of
Supply
EdExcel
Economics
1.2.5