Download Elasticity of Supply

Price Elasticity of Supply
You should be able to;
• Define price elasticity of supply (PES), give
the equation, explain the possible range of
values, explain the determinants of PES,
and show all of the above in diagrams
On your whiteboards…
• Go to the website www.fairtrade.org.uk
• Find out 5 things this British organisation does to
empower workers around the globe.
Price Elasticity of Supply
• Price elasticity of supply measures the responsiveness of
the quantity supplied of a good to a change in its price in a
given time period
• Formula for calculating elasticity of supply (Pes)
– % change in quantity supplied divided by the % change in price
• Normally as price rises - so does supply (as higher prices
send the signal to producers of a rise in potential profits)
• So price elasticity of supply (PeS) will have a positive coefficient
• We are mainly concerned with the ability of a business to
alter supply to meet changes in market demand
Price Elasticity of Supply - Measurement
ES =
% change in quantity supplied
% change in price
ES > 1
price-elastic supply
ES = 1
unit-elastic supply
ES < 1
price-inelastic supply
Es = 0
perfectly inelastic supply
Es = infinity perfectly elastic supply
What Determines Supply Elasticity?
•
Factor substitution possibilities
– Can labour/capital be switched easily when there is a change in demand
• When factor substitution is possible, supply will tend to be elastic
• When factors are highly specialized, substitution may be harder
•
Spare production capacity available
– When there is spare factor inputs available, businesses can expand output easily
without pressure on costs to rise
•
Stocks (inventories) available to meet changes in demand
– A low level of stocks makes supply relatively inelastic
– When stocks can be off-loaded onto the market, supply is elastic
•
Time frame allowed for the supply to come to the market
– Momentary period (fixed supply)
– Short run (inelastic supply)
– Long run (elastic supply)
•
Artificial limits on supply
– E.g. the impact of patents that limit which firms can supply a product
Would the producers of these products be
responsive to changes in price? Explain your
reasoning…
1.
2.
Would the producers of these products be
responsive to changes in price? Explain your
reasoning…
3.
4.
This company also makes staples,
drawing pins and tacks
Would the producers of these products be
responsive to changes in price? Explain your
reasoning…
5.
The
factory is
working
at full
capacity!
6.
Now let go back and think about the
PED of these products in Malaysia…
• For each product, discuss the PED and draw a
graph for each which shows your estimated
slope of the supply and demand. Label the
graph correctly.
Applying The Concept of Elasticity of
Supply
•
Seats in a football stadium / theatre / cinema
–
–
•
An increase in demand for fresh salmon
–
–
•
Variable amount of spare capacity among the major oil producers
Can oil stocks be put onto the market to meet the rise in demand?
Oil supply might be inelastic if current output is close to capacity
The supply of drugs required to treat Anthrax
–
–
–
•
Time lags in the production process – fixed supply available to the market in momentary period
(i.e. the daily catch)
Longer term; change in the number of vessels, length of time at sea
World supply of oil following a large rise in world demand
–
–
–
•
Short run capacity of any stadium is more or less fixed
Long run – expansion of stadium capacity / development of a new ground
Short term supply is dependent on stocks of product available
If stocks are low, supply cannot increase in the short term to meet demand
Debate over the use of patents and how this limits production in the long run
The supply of new housing
–
–
Planning permission + availability of land to develop + shortages of skilled labour
Time lags in the production process – new housing developments take months to complete