Price Elasticity

of Supply
Price Elasticity of Supply
•
 Values of PES
1. When PES > 1
The supply of the good is elastic. What does this mean?
Qs is sensitive to change in prices.
This means that the change in Qs will be larger than the
change in price.

Example?
 Values of PES
2. When PES < 1
The supply of the good is
inelastic. What does this
mean?
Qs is not too sensitive to
change in prices.
This means that the change in
Qs will be smaller than the
change in price.

Example?
 Values of PES
3. When PES = ∞
PES is perfectly elastic.
Producers are willing to supply as much
as they can at one particular price and
nothing at any other price, the supply is
said to be infinitely price elastic.

Example: A real world example of truly

price elastic supply is very difficult.
 Values of PES
4. When PES = 0

The supply of the perfectly inelastic.

What does this mean?
Qs does not change as a result of a
change in price.
This means that the change in Qs
remains the same whatever the price.
 Values of PES
When PES = 0
 Values of PES
5. When PES = 1
The supply of the good is unitary elastic. What does this
mean?
This means that the % change in Qs will be equal to the %
change in price.
Example?
 Values of PES
Can you label the figures?
Values of PES
 Determinants of PES
1. Spare capacity of firms
2. Length of time.
3. Ability to store stocks.
4. Mobility of factors of production.
 Determinants of PES
1. Spare capacity of firms
Spare/ unused capacity makes it easier for firms to
increase or decrease capacity and hence to respond to ca
change in price.
Examples?
The more the spare capacity, the more elastic the PES
and vice versa.
 Determinants of PES
2. Length of time
The more the amount of time the firms have to adjust
their supply to a change in price, the more elastic their
supply.
For most goods, the supply will be relatively more
inelastic in the short run and more elastic in the long run.
Land, labour and capital are variable in the long run.
Examples?
 Determinants of PES
3. Ability to store stocks
The firms that have the ability to store stocks (have
warehouse facility) will have a more elastic supply than
the firms that do not have such spare capacity.
Examples?
Determinants of PES
4. Mobility of factors of production
PES also depends on the ease and speed with which firms
are able to shift resources between different products.
 Determinants of PES
• Low-tech manufactured goods (e.g. ____________)
and low-skilled services (e.g. ____________) tend
to have relatively ____________ supply as more
workers can easily be hired and trained, while more
raw materials can be ordered.
• High-tech manufactured goods (e.g.
____________) and high-skilled services (e.g.
____________) tend to exhibit
highly____________ supply.
Implications of PES for decision making