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03.03 Price Elasticity of Supply
03.03 Price Elasticity of Supply
Learning outcome
■ Use the formula for PES to calculate PES, changes in
price and changes in quantity
■ Identify the various degrees and range of values for PES
■ Draw diagrams showing the range of values for PES,
including relatively elastic, inelastic, perfectly inelastic,
perfectly elastic and unitary
■ Analyse the determinants of PES
■ Apply PES to analyse the reasons why primary
commodities generally have a lower PES than
manufactured products
Price Elasticity of Supply
■ Price elasticity of supply (PES) measures the
responsiveness of quantity supplied to
changes in price
■ The PES can be calculated using the formula:
■ After a massive surge in consumer demand, the market price for good
A rises to $15.74, up from its original price of $14.99. Firms operating
in the market respond by increasing output from 12,500,000 units per
annum to 13,500,000 per annum
■ Output from producers has gone from 55495 units per month to 57715
units per month. This occurred after favourable coverage in a popular
documentary leading to rising demand for good A. This has pushed up
prices from $25 to $27.
■ If P↑ then Qs↑
■ If P↓ then Qs↓
Price Elasticity of Supply
To summarise:
■ PES = 0 perfectly inelastic
■ PES < 1 inelastic
■ PES = 1 unitary
■ PES > 1 elastic
■ PES = ∞ perfectly elastic
O Q1 Q
Inelastic supply
P
PES < 1
S
O Q
Unitary
P
S
PES = 1
O Q
Elastic supply
P S
PES > 1
O Q
Perfectly elastic supply
P PES = ∞
O Q
Influences on Price Elasticity
Mobility/flexibility of resources
■ The more readily available resources are to firms the more elastic
supply will be as they can easily acquire more resources at low
cost and increase output in response to a price rise
The local supply of chicken to the market has increased from 30,000
per week to 31,230 as a result of the price increasing from 30RMB to
35RMB.
■ 25%/20% = 1.25
■ 4.1%/16.7% = 0.25
■ Takes a long time to grow (a few months from planting to harvest) so if farmers
want to produce more wheat, they will plant more seeds, but it will take several
months for this extra production to be sold on the market.
■ Food is often difficult to store for long periods of time, so there isn’t ‘extra stock’
that can be released onto the market when producers want to increase supply.
■ Little spare capacity – most of the land that is suitable for agriculture is already
being used. Increasing production of wheat means reducing production of other
foods. Farmers may be reluctant to make this decision in the short-term (it carries
a risk that prices of wheat may fall again before the farmer harvests the wheat)
Explain why hi-tech products that require significant levels of investment to
produce would tend to have a lower PES than simple manufactured products.
■ Other markets, e.g. the market for clothes, would be much more elastic
as it is relatively simple and cheap to start a company that manufactures
clothes. As price increases, new firms will enter the market quickly and
supply increases. As prices fall, firms can easily switch production to
something else and exit the market, hence supply will quickly fall.