Price elasticity of supply (PES)
PES indicates how the quantity supplied responds to changes in price.
To calculate PES we use the formula ‘percentage change in quantity supplied over percentage change in price’.
Using this supply schedule we can calculate PES over a range of supply. For
example. PES over the range price 3 to 4. In this case, PES is 1 over the whole
range.
The value is equal to 1 at any point on a linear supply curve coming out of the origin.
Linear supply curves that start from the y-axis, and slope upwards
have a PES value greater than 1 - or elastic.
Linear supply curves that start from the x-axis, and slope upwards have
a PES value less than 1 - or inelastic.
Determinants of price elasticity of supply
Several factors can make supply more or less elastic, including:
- The availability of raw materials - greater availability leads to an
increased ability to supply.
- The availability of labour - if labour is in short supply elasticity
of supply will be lower.
- The extent to which labour can be reduced - if labour is heavily
unionised, or there is strict legislation regarding firing and firing of
labour, it might not be possible to reduce supply in response to a price
drop.
- Whether stocks of finished products or raw materials are available -
greater availability means a faster response to changes in market price.
- Whether there the firm has spare capacity - with spare capacity,
production can be quickly increased as a response to higher prices.
- The timeframe being considered - supply will be much more elastic in
the long run compared with the short run.
Summary
Questions
Read the
questions and complete an answer before revealing if you are
correct:
Producer surplus
Is elasticity of supply related to producer surplus?
Producer surplus