1.2.4 Price Elasticity of Supply (PES)

Syllabus Statement: Explain the concept of price elasticity of supply, understanding that it involves responsiveness of quantity supplied to a change in price, along a given supply curve Explain, using diagrams and PES values, the concepts of price elastic supply, price inelastic supply, unit elastic supply, perfectly elastic supply and perfectly inelastic supply

PRICE ELASTICITY OF SUPPLY (PES)

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PRICE ELASTICITY OF SUPPLY (PES): Measures the responsiveness of the quantity supplied of a good to a change in price

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• Inelastic Supply ( PES < 1 ) : Quantity supplied is relatively unresponsive to price

• Elastic Demand ( PES > 1 ) : Quantity supplied is relatively responsive to price

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Formula:

• As there is a Positive Causal Relationship between the price of a good and quantity supplied, the price elasticity of supply (PES) is a positive number:

• For any percentage increase in price (a positive denominator), there results a percentage increase in quantity supplied (a positive numerator), thus leading to a positive PES

• Similarly, for any percentage decrease in price (a negative denominator), there results a percentage decrease in quantity supplied (a negative numerator), also leading to a positive PES

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Example: Strawberries

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    Suppose the price of strawberries increases from $3 per kg to $3.50 per kg, and the quantity of

    strawberries supplied increases from 1000 to 1100 tonnes per season. Calculate the PES for

    strawberries.

    As the PES is 0.59 < 1, the supply of Strawberries is Inelastic

TYPES OF PRICE ELASTICITY OF SUPPLY (PES) 

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As the price elasticity of supply (PES) compares the percentage change in quantity supplied of a good to the percentage change in price, the PES can take a range of values with varying significance:

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SPECIAL CASES:

Syllabus Statement: Explain the determinants of PES, including time, mobility of factors of production, unused capacity and ability to store stocks

DETERMINANTS OF PRICE ELASTICITY OF SUPPLY (PES)

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DETERMINANTS OF PRICE ELASTICITY OF SUPPLY: Factors that affect the elasticity of a good or service

1) TIME PERIOD 

• In a short time period, producers have no time to adjust inputs to change the quantity of good supplied; hence, the supply for the good will be price inelastic

• In a long time period, producers have more time to adjust inputs to change the quantity of good supplied; hence, the supply for the good will be price elastic

2) MOBILITY OF FACTORS OF PRODUCTION 

• If a good is produced using mobile factors of production, producers can quickly shift resources and production between different products; hence, the supply for the good will be price elastic

• If a good is produced using immobile factors of production, producers cannot quickly shift resources and production between different products; hence, the supply for the good will be price inelastic

3) SPARE (UNUSED) CAPACITY OF FIRM

• Spare capacity refers to the availability of factors of production to produce additional units of a good (for example, factories or equipment may be idle for some hours each day)

• If a good is produced in spare capacity, producers have a surplus of resources to change the quantity of a good supplied; hence, the supply for the good will be price elastic

• If a good is produced in full capacity, producers have no surplus of resources to change the quantity of a good supplied; hence, the supply for the good will be price inelastic

4) ABILITY TO STORE STOCK

• Goods produced by a firm may be perishable or non-perishable

• If a good is perishable, producers cannot store stock of output and must supply all quantity available; hence, the supply for the good will be price inelastic

• If a good is non-perishable, producers can store stock of output and change the quantity of good supplied; hence, the supply for the good will be price elastic

Syllabus Statement: Explain why the PES for primary commodities is relatively low and the PES for manufactured products is relatively high

PRICE ELASTICITY OF SUPPLY (PES) OF PRIMARY COMMODITIES

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PRIMARY COMMODITIES: Goods arising directly from the use of natural resources or the factor of production ‘land’: this includes agricultural (food and non-edible products such as cotton), fishing, and forestry products, as well as products of extractive industries (oil, coal, and minerals)

The price elasticity of Supply (PES) of primary commodities is relatively low:

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• As primary commodities require a long period of time to be extracted and produced, producers cannot quickly change the quantity supplied

• For this reason, the supply for primary commodities is relatively unresponsive to price, with a change in price leading to a smaller percentage change in quantity supplied

• Hence, the supply for primary commodities is price inelastic

PRICE ELASTICITY OF SUPPLY (PES) OF MANUFACTURED PRODUCTS

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MANUFACTURED PRODUCTS: Processed goods arising from factors of production ‘capital’ and ‘labour’ using raw materials and intermediate inputs

The price elasticity of supply (PES) of manufactured products is relatively high:

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• As manufactured products are often produced in spare capacity using mobile factors of production - specifically labour and capital - producers can quickly adjust inputs to change quantity supplied

• For this reason, the supply for manufactured products is relatively responsive to price, with a change in price leading to a larger percentage change in quantity supplied

• Hence, the supply for manufactured products is price elastic