Price Elasticity of Supply

This measures the % change in QS after a change in Price

PES = % change in QS
           % change in Price

 

Inelastic Supply.

This means that an increase in price leads to a smaller % change in demand Therefore PES <1

 

Supply could be inelastic for the following reasons

• 1. Firms operating close to full capacity.
• 2. Firms have low levels of stocks, therefore there are no surplus goods to sell
• 3. In the Short term, capital is fixed in the short run e.g. firms do not have time to build a bigger factory.
• 4. If it is difficult to employ factors of production, e.g. if highly skilled labour is needed
• 5. With agricultural products supply is inelastic in the short run, because it takes at least 6 months to grow crops, in Sep the farmer cannot suddenly produce more potatoes if the price goes up
  

Elastic Supply

· This occurs when an increase in price leads to a bigger % increase in supply, therefore PES >1

 

Supply could be elastic for the following reasons:

• 1. If there is spare capacity in the factory
• 2. If there are stocks available
• 3. In the long Run supply will be more elastic because capital can be varied
• 4. If it is easy to employ more factors of production

Question on Price Elasticity of Supply Equation

• PES is 2.0 for CDS: and the firm supplied 4,000 when the price was £30.

Q. If the price increased from £30 to £36, what will be the new Q?

• QS increases by 6, therefore as a % 6/30 = 0.2 = 20%
• 2.0 = % change in QS /20
  
• 40 = % change in QS
• Therefore new Q = 4000 *140/100 = 5,600
  

Essays and Revision Notes on Supply and Demand

• Demand
• Supply
• Market Equilibrium
• Price Mechanism Long Term
• Demand and Utility
• Consumer and Producer Surplus

Elasticity

• Price Elasticity of Demand
• Income Elasticity of Demand
• Cross Elasticity of Demand
• Price Elasticity of Supply