CHAPTER 6

PRICE ELASTICITY OF SUPPLY

(PES)

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LEARNING OBJECTIVES
• At the end of the lesson, you should be
able to:
❑ Define and calculate PES
❑ Illustrate different values of PES using
supply curves
❑ Explain the determinants of PES
❑ Explain the likely differences in PES for
primary commodities and manufactured
goods

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SUBTOPICS
ELASTICITY OF SUPPLY

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 2.0 ELASTICITY OF SUPPLY
PRICE ELASTICITY OF SUPPLY (PES)

A measure of how much the supply of a product changes

when there is a change in the price of the product

FORMULA
PES : % Change in Qty
Supplied
% Change in Price of
the Product
 THE RANGE VALUES OF PRICE ELASTICITY OF
SUPPLY

PES = 0 Perfectly Inelastic Supply

PES < 1 Inelastic Supply
PES = 1 Unit Elastic Supply
PES > 1 Elastic Supply
PES : INFINITY Perfectly Elastic

PERFECTLY INELASTIC
SUPPLY
- Value of PES is equal to zero
- Change in the price of a product will have no effect on the
quantity supplied
- The percentage change in quantity supplied would be zero, so
no matter what is the percentage in price, the PES value will be
zero.
 PERFECTLY ELASTIC SUPPLY

- Value of PES is equal

to infinity
- The value of quantity
supplied is infinite, so
no matter what is the
percentage change in
price, the PES value
will be infinity

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 PERFECTLY ELASTIC SUPPLY

- In international trade, it is
to often assumed that the
supply of commodities,
such as wheat, available
to a country for import is
infinite.
- The consumers in the
country can have all that
they want as long as they
are prepared to pay the
current world market
price.
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 INELASTIC SUPPLY

- Value of PES is less than one and greater than zero

- If a product has inelastic supply, then a change in the price of the
product leads to less than proportionate change in the quantity
supplied of it.
 ELASTIC SUPPLY
- Value of PES is greater than one and less than infinity
- If a product has elastic supply, than a change in the price of the
product leads to a greater than proportionate change in quantity
supplied.

UNIT ELASTIC SUPPLY

- Value of PES is equal to one
- If a product has unit elastic supply, then a change in the price of the
product leads to a proportionate change in quantity supplied.
DIAGRAM

S1 & S2: UNIT ELASTIC

S3: INELASTIC
S4: ELASTIC

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 DETERMINANTS OF PRICE
ELASTICITY OF SUPPLY

1)How much the costs rise as output is increased

If total costs increase significantly, producer will not increase the
supply. It would take large price rises to make increasing the
supply worthwhile. Thus, PES: RELATIVELY INELASTIC
If total costs not increase significantly, producer will increase the
supply and take advantage of the slow increase in costs to benefit
from higher prices thus making more profit, PES: RELATIVELY
ELASTIC

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 FACTORS THAT ASSIST IN PREVENTING A
SIGNIFICANT RISE IN COSTS
1) THE EXISTENCE OF UNUSED CAPACITY
❖If a firm has significant productive resources that
are not being fully used, then the firm will be able
to increase output easily and without great cost
increases
→ PES : RELATIVELY ELASTIC

❖If a firm is producing at full capacity then it is

difficult to increase supply without a significant
increase in productive resources, which will be
expensive.
→ PES : RELATIVELY INELASTIC
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 FACTORS THAT ASSIST IN PREVENTING A
SIGNIFICANT RISE IN COSTS

2) THE MOBILITY OF FACTORS OF PRODUCTION

❖If factors of production are easily moved from one
productive use to another then PES : RELATIVELY ELASTIC.
❖A shift from a production of one-litre plastic bottles to a
production of two-litre plastic bottles.
- If there is an increase in the price two-litre plastic bottles
increases, then the extra cost of switching to the larger
bottles will not be great thus the producers can easily
increase the quantity of two-litre bottles.

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 DETERMINANTS OF PRICE
ELASTICITY OF SUPPLY

2) The time period considered

In short term, PES tends to be more inelastic
- In the short run, firms may be able to increase the quantity of some
FOP such as raw materials and labour but they may not be able to
increase all of their FOP such as number of machines and the size of the
factory.
In long term, PES tends to be more elastic

3) The ability to store stock

If the firm is able to store high levels of stock of their product, then they
will be able to react to price increases with swift supply increases.
PES : RELATIVELY ELASTIC

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 Difference in PES

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COMMODITIES-
RELATIVELY INELASTIC
For example, if there were an
increase in the demand for
cocoa, and therefore an
increase in the price of cocoa.
Producers would be unable to
respond with a proportionate
increase in the quantity as it
takes time to grow the cocoa.
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Difference in PES
MANUFACTURED PRODUCTS-
RELATIVELY ELASTIC
Supply of manufactured goods
tends to be more elastic as it is
easier to increase or decrease
the quantity supplied.
With manufactured goods, it is
likely that there may be
unused capacity, a more
mobile FOP and relatively easy
to store high levels of stocks.
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END OF THE TOPIC

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