Download Price Elasticity of Supply: Factors and Implications and more Lecture notes Printing in PDF only on Docsity! Price Elasticity of Supply Price elasticity of supply measures the relationship between change in quantity supplied and a change in price. • If supply is elastic, producers can increase output without a rise in cost or a time delay • If supply is inelastic, firms find it hard to change production in a given time period. The formula for price elasticity of supply is: Percentage change in quantity supplied divided by the percentage change in price 1. When Pes > 1, then supply is price elastic 2. When Pes < 1, then supply is price inelastic 3. When Pes = 0, supply is perfectly inelastic 4. When Pes = infinity, supply is perfectly elastic following a change in demand What factors affect the elasticity of supply? (1) Spare production capacity If there is plenty of spare capacity then a business should be able to increase output without a rise in costs and supply will be elastic in response to a change in demand. The supply of goods and services is most elastic during a recession, when there is plenty of spare labour and capital resources. (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 elastic. Conversely when stocks are low, dwindling supplies force prices higher because of scarcity in the market. (3) The ease and cost of factor substitution If both capital and labour resources are occupationally mobile then the elasticity of supply for a product is higher than if capital and labour cannot easily be switched. A good example might be a printing press which can switch easily between printing magazines and greetings cards. (4) Time period involved in the production process Supply is more price elastic the longer the time period that a firm is allowed to adjust its production levels. In some agricultural markets the momentary supply is fixed and is determined mainly by planting decisions made months before, and also climatic conditions, which affect the production yield. An empty restaurant – plenty of spare capacity to meet any rise in demand! When networks get congested at peak times, elasticity of supply becomes low Stocks in a warehouse – businesses with plentiful stocks can supply quickly and easily onto the market when demand changes For many agricultural products there are time lags in the production process which means that elasticity of supply is very low in the immediate or momentary time period Price Quantity Price Quantity Perfectly elastic supply An elastic supply curve D2 D1 P1 D2 D1 S S Q1 Q2 Q1 Q2 If Pes is inelastic: it will be difficult for suppliers to react swiftly to changes in price If Pes is elastic – supply can react quickly to changes in price
