Price Elasticity of Supply

(AS Economics Version)

 Lesson Objectives
• Introduce the idea of PES.
• Perform arithmetic computations relevant to PES.
• Identify “special elasticities” graphically for PES.
• Explain the factors that influence a good’s PES. Explain the relevance of
PES for firms or policy makers. (Time permitting, possibly next lesson)
 Bellwork
• 1. State the formula for and define Price Elasticity of Supply
• 2. Write 2 goods you can think of that are likely supply elastic. Write
down 2 more that you think are likely supply inelastic
(On this slide, we will write down the answers
students came up with and discuss them)
 Price Elasticity of Supply

• How responsive is Qs when price changes?

• Can firms easily produce and sell additional units when prices go up? Can
they contract or shrink the number of units being supplied when prices
fall?
• The factors that influence PES are quite difficult to remember. Exam
MCQs will often try to trick you by also including factors that influence
PED in the answers.
 Supply Inelastic goods
• 1. Agriculture
• 2. Housing
• 3. Movie Theatre seating
• 4. Playground
• 5. Spaceships
 Supply Elastic Goods examples
• 1. Food, especially packaged unhealthy foods you should not eat.
• 2. Electronic devices
• 3. Most services (higher skilled ones, such as economics teaching, or brain
surgery might take much longer to increase production)
• 4. Most Retail goods (clothing, appliances, electronics, etc)
 What affects price elasticity of supply?
• 1. Time
• 1.5 production speed
• 2. Availability of Resources
• 3. Spare capacity
• 4. Number of firms
• 5. Availability of stocks (units in storage,
“inventories” in American English)
• 6. Factor mobility
 Time
• Like with demand, if firms are given a longer time to react to changes in
price, the good will be more elastic.
• This is ultimately because production itself takes time; if we see an
increase in price, we may not be able to react next month simply because
producing the product takes 3 months per unit. But the same price
increase sustained over 6 months allows firms to react.
 Production Speed
• The faster we can make a good, the higher its PES will be. If the price
rises, because it doesn’t take a long time to make, we can easily increase
our production.
 Availability of Resources
• Can firms easily obtain the inputs to production such as raw materials or
factors of production used in making this good? If so, the supply will be
very elastic.
• When workers, capital, land, and enterprise as well as raw materials for
producing a good or service are scarce and expensive, it will lead to PES
being more inelastic.
 Availability of Resources
• If we need to produce more unhealthy snacks in a factory and need more
low skilled workers to do so, can we easily find low skilled factory
workers? If we need more brain surgeons to do emergency life saving
cancer surgeries, can we easily find new brain surgeons?
 Spare Capacity
• Spare capacity refers to extra factors of production that aren’t being fully
utilized and could be used to make more of a good or service. Workers
not working full time, machines or capital equipment not being fully
utilized, extra space or land, etc. If spare capacity is present, PES will be
more elastic; we can easily start to use our factors of production more than
before and this is much quicker than trying to find and employ brand new
factors of production.
 Number of Firms
• More firms= more elastic supply. We have more companies working to
increase output in response to a price change. More is better than fewer?
Availability of Stocks and ability to store
• Can this good easily be stored? Will this good expire/rot or will it stay
around for a very long time to be sold later? If the good can be stored
easily, it will usually have a higher PES. This is because firms can
strategically overproduce the good and release more units of the good if
and when the price increases (for example, oil).
• Availability of stocks is closely related, basically it just means are there
already units in storage that can be released for sale in the event that
prices increase? Clearly, if this is true, we have higher PES.
 Factor Mobility
• Can factors of production from other industries easily be re-adapted and
retrained to work in our good’s industry? If the answer is yes, the good
will be much more supply elastic.
 (Cover this if a student asks)
Why is it that PES=1 for any supply curve which begins at the origin?
This is because beginning at the origin implies that when P=0, Qs=0. This
indicates that *any* price change resulting in *any* change in Qs will result
in values of “infinity” for price change and for Qs change as a result of
starting from a value of 0. Due to the properties of 0 mathematically, a
change from “0” to “any positive value” will result in a percentage change
of infinity. With infinity in both the numerator and denominator, the result is
then “1”.
 Example Essay Questions

• (a) How does the introduction of minimum price impact consumers and producers
differently? Support your arguments with relevant diagram. [8]

• (b) Business decisions, like setting prices, determining stock level and advertising, are
mainly influence by the price elasticity of demand for its product. The price elasticity of
supply of its product has no practical use.

• Discuss the relative merits of these statements. [12]

• 3 (a) Explain two factors that determine the price elasticity of supply of an
agricultural good. [8]

• (b) Taxes are often placed on consumer electrical and electronics, even those
that are necessities with few substitutes.
• Discuss whether the incidence of a tax on these products always falls mainly
on the producer. [12]
 Price Elasticity of Supply
(IGCSE Economics Version)
 Bellwork
• 1. What is PES? State the formula.
• 2. What are some goods that can’t be easily stored? Do you suspect they
have high or low PES?
 Price Elasticity of Supply

• How responsive is Qs when price changes?

• Can firms easily add additional units when prices go up? Can they
contract or shrink the number of units being supplied when prices fall?
• The factors that influence PES
 What affects price elasticity of supply?
• 1. Production speed
• 2. The cost of altering its supply
• 3. The ability to store the good
 Production Speed
• If the good can be produced really fast, it’s going to be relatively more
supply elastic.
 The cost of altering its supply
• If it’s a good where producers have a lot of spare capacity (extra
productive resources that currently aren’t being fully used) or if the inputs
to production are relatively cheap and available, then the cost of altering it
supply is low and therefore it is more supply elastic. `
 Storage
• Some goods can be stored very easily; in this case firms can
“overproduce” the good and sell more of it whenever the prices go up.
Some goods, like fresh fruit, might be very difficult or impossible to store
for a very long time, so as a result firms will never have extra units laying
around to release and sell when prices increase.
 Supply Inelastic goods
• 1. Oil (Petroleum Engineer)
• 2. Houses
• 3. Spaceships (aeronautical engineers)
• 4. Human Organs
• 5. Concerts
 Supply Elastic Goods examples
• 1. Bad video games (not 元神 )
• 2. Processed food
• 3. Already developed medicines (generics)
• 4. Masks
• 5. Clothing