SECTION 2: THE ALLOCATION OF RESOURCES

CHAPTER 12: PES

PRICE ELASTICITY OF SUPPLY

Price Elasticity of Supply (PES): A measure of the proportionate response of quantity supplied
to a proportionate change in the price of the good or service.
PES = %ΔQS / %ΔP
PES > 0 (LAW OF SUPPLY)

SUPPLY IS PERFECTLY PRICE-ELASTIC SUPPLY IS PERFECTLY PRICE-INELASTIC SUPPLY IS UNITARY PRICE-INELASTIC

SUPPLY IS PRICE-INELASTIC SUPPLY IS PRICE-ELASTIC

Define Perfectly inelastic supply: a change in price causes no change in supply.

 THE DETERMINANTS OF THE PES
- Time (SR = Inelastic - LR = Elastic)
- The ability to hold stock (Cheap/Easy ➔ Elastic - Costly/Difficult ➔ Inelastic)
- The availability of inputs (High➔ Elastic - Low ➔ Inelastic)
- The number of substitutes in production (Many ➔ Elastic - Few ➔ Inelastic)
- The size of barriers to entry/exit (High ➔ Inelastic - Low ➔ Elastic)-
Barriers: costs/technology/production skills/government licenses.

Analyse why price elasticity of supply can differ between products.

Products which can be produced quickly will have elastic supply
Products which can be stored /non-perishable will have elastic supply
Products which are made with raw materials in short supply will have inelastic
Products made by firms with spare capacity/mobile resources/have a low cost of
altering production/ low cost of attracting resources into the industry may have elastic supply .

Analyse the factors that may make the supply of a product more price-elastic. (just list some
points, you should explain in details when you answer questions)
The production period may decrease e.g. due to advances in technology making it easier to alter the quantity
produced .
The time period available easier to adjust supply in longer time period.
lt may become easier to store the product e.g. due to the building of more storage facilities making it easier to
bring more products onto the market or withdraw them from the market .
More sources of a raw material may be found giving greater flexibility of supply .Mobility of factors of production
able to substitute between products being produced .
Ability to source additional resources at similar cost retaining profit margins.
Lack of barriers to entry enables new firms to enter the market.