Download Supply and PES

Questions
• Explain whether primary commodities are likely to
have a low or high PED.
• Explain whether manufactured goods are likely to
have a low or high PED.
• Explain whether primary products have a low or high
YED? What does this mean for the producers of
primary products? What implications does this have
for countries who specialise in exporting primary
products?
• Explain whether primary products have a low or high
YED? What does this mean for the producers of
primary products? What implications does this have
for countries who specialise in exporting primary
products?
Explain the significance of the
following figures for a business
• PED= -0.3
• YED= -2
• XPED of product A with respect to a
change in the price of product B is 0.6
Supply
Lesson Objectives
• To be able to define ‘supply
• To be able to illustrate and explain a
movement along a supply curve and a
shift of the supply curve including the
causes
• To understand and be able to calculate
Price Elasticity of Supply (PES)
• To understand what influences PES
Supply
• The quantity of goods that sellers are
willing and able to sell at any given price
over a period of time
• As the price of a product rises the
quantity supplied of the product will
usually increase, ceteris paribus
• Assumes firms are motivated by profit
(so does not apply to much of what is
produced by the gov.)
Price
S1
P2
P1
0
Q1
Q2
Quantity
• If the price of a product changes then
there will be a movement along the
supply curve (extension or contraction
of supply)
• Any other factors affecting supply will
cause a shift in the supply curve
Shifts of the supply curve
• RATNESTS
• Raw materials (cost of)
• Alternate goods
(producers can produce
different goods with same resources)
– Some goods are in ‘competitive supply’
– A rise in the P of one product will cause
the supply of that product to extend and
the supply of other products to decrease
– Example- a firm can produce skateboards
and roller skates with the same resources,
if the price of skateboards increased, the
firm is likely to switch production from
roller skates to skateboards thus
extending the supply of skateboards and
decreasing supply of roller skates
– Other goods are in ‘joint supply’
– Eg. Petrol and paraffin, a rise in the price
of petrol will cause the supply of petrol to
extend and the supply of paraffin to
increase
– Show on 2 diagrams
• Taxes- indirect taxes (Eg. VAT)
• New firms entering the market/ firms
leaving the market
• Expectations
• Seasons incl. weather conditions
• Technology
• Subsidies
Show.…
• What would happen to the supply of coal if
a large coal mining firm had an increase in
the cost of their machinery
• What would happen to the supply of
mopeds if there were a large increase in
tax on mopeds
• What would happen to the supply of white
bread if a firm were to discover that
there had been a large increase in the
demand for brown bread which they could
also produce
Producer Surplus
The difference between the market
price a firm receives and the price at
which it would be prepared to supply
The area P0P1E therefore, are ‘surplus
earnings’ for the firm/industry (sum of
the producer surplus earned at every
level)
Price
Producer Surplus
S
P1
E
P0
0
Q1
Quantity
Producer Surplus
• Show the effect an increase in price
will have on producer surplus
Activity for h/w
• Page 33 Exam question 4
• Note:
Paper 1 in the IB exams:
2x 25 mark questions in 1hr 30 mins
1q= 45 minutes
Part a (10 marks)= 15-20 mins (1-1 ½ sides of
A4)
Part b (15 marks)= min 25 mins (2-2 ½ sides
of A4)
Elasticity of Supply
• PES measures the responsiveness of
quantity supplied to changes in price
Calculating PES
PES =
% ∆ QS
%∆P
Example
The price of a product rises from £10 to £15
and supply rises from 200 to 500
The PES will be …
Value
Description of Response
Perfectly PES= 0 There is no response in supply to a
Inelastic
change in price
Inelastic 0 <PES< 1 % Δ in quantity supplied is less than
% Δ in price
PES= 1 The percentage change in quantity
Unitary
supplied equals the percentage change
in price
Elastic
Perfectly
Elastic
% Δ in quantity supplied is more than
% Δ in price
PES= ∞ Producers are prepared to supply any
amount at any given price
1 <PES>
∞
Elasticity Of Supply
S ( E= 0)
Price
The elasticity of supply of a
straight line supply curve varies
depending upon which axis it
intersects or whether it intersects
at the origin
S (E=∞)
Quantity
Price
Inelastic Supply
S
Price
Quantity
Any straight line supply
curve passing through the x
axis has a PES of less than 1
S
Elastic Supply
Quantity
Any straight line supply
curve passing through the y
axis has a PES greater than
than 1
rice of
offee
eans
S2
S1
P1
Q2 Q1
Quantity of
coffee beans
Any straight line supply
curve passing through the x
axis has a PES of less than 1
Any straight line supply
curve passing through the y
axis has a PES greater than
than 1
S1 (E=1) passes
through origin
Price
S2 (E=1) passes
through origin
Any straight line supply
curve passing through the
origin has a PES of 1
Quantity
Non-Linear Supply Curve
Elasticity of supply varies
at different output levels.
S
Price
At low output (where the
supplier has plenty of
spare capacity) supply is
price elastic. Changes in
demand can be met easily
by changes in supply
As output rises, it moves
closer to the production
capacity of the producer,
hence elasticity of price
decreases, when capacity is
reached PES=0
Quantity
Questions
Calculate PES and comment on elasticity
• Price increases from £4 to £6 and
quantity supplied increases from 7m to
9m
• Price increases from £8 to £10 and
quantity supplied increases from 2m to
5m
• Price increases from £8 to £10 and
quantity supplied increases from 12m to
15m
Determinants of Elasticity of
Supply
• Producer substitutes
– Goods which a producer can easily produce as
alternatives eg. One model of car for another
model in the same range
– If there are many substitutes then production can
be altered quickly hence it’s elasticity will be
relatively high
– If there are no substitutes, and price falls, the
producer has no alternative but to continue
production or withdraw from the market, hence
elasticity is low
• Time
– The shorter the time period, the more
difficult firms find it to switch from
making one product to another, elasticity
will, therefore be low in the short term
– In the long run supply will be more elastic
(firms can buy more equipment, hire and
train more staff)
– Eg. Agriculture
• Spare capacity
– The more spare capacity there is, the
easier it is to increase output if price rises,
hence supply is more elastic
• Number of producers
– The more producers there are, the easier
it should be for the industry to raise
output, hence supply will be more elastic
• Nature of product
– Can product be stored?
– Supply of fresh food is more inelastic
because it is perishable,
– seats on an aeroplane?
Significance of PES
• Firms have a profit incentive to make
their supply as elastic as possible- i.e.
they can respond quickly to changes in
price
– Flexible resources
– Stock levels
• Gov. seek to increase elasticity of
supply of products
– Quicker reallocation of resources, more
competitive
– Raise mobility and flexibility of resourceshow do they try to achieve this?
Importance of Elasticity
• Relationship between changes in price and total revenue
• Importance in determining what goods to tax or
subsidise and what effect this will have on s & d
• Importance in analysing time lags in production
• Influences the behaviour of a firm
• Impact on demand for exports and imports when the e/r
changes
• Potential to exploit monopoly power in a market: The
extent to which a firm or firms with monopoly power can
raise prices in markets to extract consumer surplus and
turn it into extra profit (producer surplus)
• Impact of government intervention such as introducing a
minimum price (price floor) or maximum price (price
ceiling) into a market
Next Topic…
• Markets- equilibrium price and quantity