Price Elasticity of Supply
This measures the % change in QS after a change in Price
PES = % change in QS
% change in Price
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
· 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
- Market Equilibrium
- Price Mechanism Long Term
- Demand and Utility
- Consumer and Producer Surplus