Price Elasticity of Supply - A-Level Economics
Price Elasticity of Supply
PES = % change in quantity supplied / % change in price
Price Elasticity of Supply is a measure of how responsive quantity supplied is to a change in price.
If PES is greater than 1, the good is price elastic.
If PES is smaller than 1, the good is price inelastic.
If PES is equal to 1, the good has unit elasticity.
If PES is equal to zero, the good is perfectly inelastic.
Factors affecting PES
Perishability of the good
Perishable goods, such as fresh fruit, which cannot be stored for long periods of time are inelastic. Other goods, such as batteries, can be stored in large numbers. This means that producers can quickly increase supply by withdrawing from this storage.
Time Period
In the short run, PES is inelastic because it is difficult for producers to quickly change supply amounts.
In the long run, producers have time to change the production procedure and therefore PES is elastic in the long term.
Level of Spare Capacity
Spare capacity is the difference between the maximum quanitity a firm can produce and the quantity the firm is in fact producing.
A high spare capacity means that firms can greatly increase production-‐ PES is elastic.
A low spare capacity occurs when firms operate close to full capacity, and if this is the case it is difficult to increase production much-‐ PES is inelastic.
State of the Economy
In a recession, there are many unemployed resources, which leads to high spare capacities. Therefore, firms find it relatively easy to raise supply if needed-‐ PES is elastic.
The Ease of Entry into an Industry
When price increases, supply increases because current suppliers increase production and also because new firms enter the market. If it is difficult to enter a particular market, PES tends to be more inelastic.
For example, if the price of alcohol rises, many firms not currently producing alcohol would want to enter the market but would be unable to do so due to difficulties (e.g. alcohol trading licence). This would make the PES of alcohol less elastic (i.e. more inelastic).
PES Examples:
Agricultural Products-‐ PES is inelastic because it is difficult to store them and also because it takes a long time for crops to grow so long-‐term planning is required to increase supply.
Minerals-‐ PES is inelastic if producers need to explore and find new mine fields because this requires time and also a lot of investment in heavy machinery and construction of rail and road links. However, if there are already mine fields which are currently being used, PES is more elastic.
Long and Short Run in Economics
Economists have developed definitions of short run and long run based on PES:
- The short run is a period of time when at least one factor of production is assumed to be in fixed supply (i.e. it cannot be changed).
This fixed factor of production is normally capital (e.g. machinery, factories), although producers can increase supply by changing supply of variables such as labour.
- The long run is a period of time in which all factors of production are variable.
The length of time required for the long run varies from sector to sector. In the nuclear power industry for example, it can take many years to commission a new nuclear power plant which means that one factor of production (capital) is fixed for many years.
Price Elasticity of Supply is a measure of the responsiveness of the quantity supplied of a good or service to a change in its price. It indicates how much the quantity supplied changes when the price changes.
The formula for Price Elasticity of Supply is:
Price Elasticity of Supply = Percentage change in quantity supplied / Percentage change in price
A Price Elasticity of Supply value of greater than 1 indicates that the supply of a good or service is elastic, meaning that the quantity supplied is highly responsive to changes in price.
A Price Elasticity of Supply value of less than 1 indicates that the supply of a good or service is inelastic, meaning that the quantity supplied is not very responsive to changes in price.
Some factors that affect Price Elasticity of Supply include the availability of inputs, the time period considered, the nature of the good or service, and the ability of producers to switch to alternative production methods.
Yes, Price Elasticity of Supply can be negative. This indicates that the supply of a good or service is backward-bending, meaning that as the price increases, the quantity supplied initially increases, but then begins to decrease.
Price Elasticity of Supply is important because it helps us understand how sensitive the quantity supplied of a good or service is to changes in its price. This can help producers make more informed decisions about pricing and production levels.
Price Elasticity of Supply affects the market by influencing the quantity of goods or services supplied in response to changes in price. When Price Elasticity of Supply is high, small changes in price can lead to large changes in the quantity supplied, while when Price Elasticity of Supply is low, changes in price have little effect on the quantity supplied.
Some real-life examples of Price Elasticity of Supply include the supply of luxury goods, such as yachts or high-end jewelry, which tend to be highly elastic, and the supply of necessities, such as food and water, which tend to be highly inelastic. Additionally, the supply of seasonal goods, such as holiday decorations, may be more elastic during the off-season when demand is low.
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