Price Elasticity of Supply: Agrieconomy Khadicha Alakbarova

OCR A Level Economics
Price elasticity of supply
Agrieconomy
Khadicha Alakbarova
AS/Year 1 Microeconomics tutorial
Price elasticity of supply (PES)

PES measures the responsiveness of quantity supplied to
a change in price, price-sensitivity of sellers’ supply
Formula:
percentage change in quantity supplied

percentage change in price
2
Price Elasticity of Supply
Price elasticity Percentage change in Qs

=
of supply Percentage change in P
P
Example: S
Price P rises
P2
by 8%
elasticity P1
of supply
equals
Q
16% Q1 Q2
= 2.0
8% Q rises
by 16%
Elastic or inelastic?

Elastic supply
● If the firm is able to increase supply quickly in response to a
change in price, then supply is elastic
Inelastic supply
● If the firm is unable to increase supply quickly or find it hard
to change their production levels in response to a change in
price (in a given time period) , then supply is inelastic
4
PES Co-efficient

ES > 1 price-elastic supply
ES = 1 unit-elastic supply
ES < 1 price-inelastic supply
perfectly inelastic supply

Es = 0
Es = infinity perfectly elastic supply
“Perfectly inelastic supply”

Perfectly inelastic supply occurs when a
change in price does not affect the quantity
supplied. A firm is obsoletely unable to
increase supply if even there will be up to
90%price increase
AS/Year 1 Microeconomics © Hodder & Stoughton

Limited 2015 6
“Perfectly inelastic” (one extreme)
Price elasticity % change in Q 0%
= = =0

% change in P 10%
of supply
S curve: P
S
vertical
P2
Sellers’
price sensitivity: P1
0
P rises Q
Elasticity: by 10% Q1
0
Q changes
by 0%
“Perfectly inelastic supply example”

CAVIA IS AN EXPENSIVE
GOOD, BUT RELATED WITH
DIFFICULTIES OF BREEDING
SALMON OR BELUGA FOR 8-
20 YEARS IN SPPECIAL
CONDITIONS IT CAN BE
PERFECTLY INELASTIC
SUPPLY GOOD FOR SOME
COUNTRIES
8
“Inelastic supply”
Supply is price inelastic if a

change in price causes a
smaller percentage change in
supply.
(PES <1 )
Example of inelastic supply –
Price of wheat increase by 20%;
Q. Supply increases by 1%.
PES = 0.05
9
“Inelastic”
Price elasticity % change in Q < 10%
= = <1

% change in P 10%
of supply
S curve: P
S
relatively steep
P2
Sellers’
relatively low
P rises Q
Elasticity: by 10% Q 1 Q2
<1
Q rises less
than 10%
“Unit elastic”
Price elasticity % change in Q 10%
= = =1

% change in P 10%
of supply
S curve: P
intermediate slope S
P2
Sellers’
intermediate
P rises Q
Elasticity: by 10% Q1 Q2
=1
Q rises
by 10%
“Elastic”
Price elasticity % change in Q > 10%
= = >1

% change in P 10%
of supply
S curve: P
relatively flat S
P2
Sellers’
relatively high
P rises Q
>1
Q rises more
than 10%
“Perfectly elastic supply”
Price elasticity % change in Q any %
= = = infinity

% change in P 0%
of supply
S curve: P
horizontal
P2 = P1 S
Sellers’
price sensitivity:
extreme
P changes Q
infinity
Q changes
by any %
The Variety of Supply Curves

The slope of the supply curve is closely related to
price elasticity of supply.
• The flatter the curve, the bigger the elasticity.
• The steeper the curve, the smaller the
elasticity.
Factors determining PES

● Time
● Ease of access to specialist equipment

● Stocks
● Spare capacity
● Weather conditions
● Planning permission and other government restrictions
15
Factors affecting PES

• The time frame allowed
– 1/ Immediate period
(fixed supply)
– 2/ Short run (inelastic
supply)
– 3/ Long run (elastic
supply)
In the short-term, responsiveness of quantity supplied to price

change tends to be small as changes cannot be made quickly.
Once a crop is seeded, for example, farmers have limited ability
to alter the quantities they put on the market. Therefore, in the
short-term, supply is relatively inelastic or unresponsive. Where
there is no opportunity to adjust production in response to price,
the supply curve is vertical and the market supply is fixed.
For many goods, price elasticity of supply is greater in the long

run than in the short run, because firms can build new factories,
or new firms may be able to enter the market.

• Factor substitution
possibilities following a
change in demand for the
product
– When factor substitution
is possible and can be
achieved at low
cost, supply will be
elastic A good example is the alternative
– When factors are highly uses to which farm land can be
specialized, substitution put when demand conditions
may be harder and change – the time lag in switching
production from one crop to
thus supply will be
another
inelastic

Temporary workers
can help to relieve
shortages of
labour and improve
the elasticity of
supply

• Stocks (inventories)
available to meet
demand
• A low level of stocks
makes supply
inelastic in the short
term
• When stocks can be
released onto the A high level of inventory (stocks)
means that fresh supplies can be
market, supply is taken to market quickly – supply will
elastic be elastic

The ability of a product to be stored affects how much a producer
can offer for sale in a given time period.
Consider a product like grain, which is easily storable. In one crop
year, a producer may offer for sale both this year's crop and also
what is in storage from previous years.
Conversely, if a product is perishable, like lettuce, mushroom, egg
market supply will be limited to what is currently produced.
21

Spare production capacity
available
• When there is spare
capacity, businesses can
expand output easily to meet
rising demand without
upward pressure on costs
Planning permission • The supply of new

and other government agri farm
restrictions – Planning
permission
Agriculture farming is often + availability of land
supply inelastic because in to develop +
certain areas it is hard to find shortages of skilled
suitable land or get planning labour
permission to build more
farms.
– Time lags in the
production process
– new farming
developments take
months to complete

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OCR A Level Economics