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