Theme 1 - PES
Price Elasticity of Supply
On the axes below, draw a supply curve and label the impact of a price change upon quantity.
Explain why this relationship between price and supply occurs.
-
e
S
P
P,
-
when there is
in
-
---
- -
-
the
price,
I
more
I
supply
an
increased
supplies
motivated and
are
would
more
I
Price
I
I
I
I
I
I
I
b
I
I
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I
Q
Q
Quantity Supp lied
What does price elasticity of supply (PES) measure?
PES
measure
supplied
to a
the
responsiveness
change
t he
of
quantity
of
the
product.
price
in the
How do we calculate price elasticity of supply (PES)?
PES
=
%
change
in
qty supplied
%. change in price
Elastic PES coefficient =
PES> 1 ->
->
price
Inelastic PES coefficient =
elastic
PESC1 -
aty supplied responds
proportionately to
a
than
more
change
in
the
change in
Explain why the PES coefficient will always be a positive number.
always positive
varies with the
changes
supplied
aty
Price aty supplied
Pricey
to
4
inelastic
proportionately len
its
price
PES is
price
He
qty supplied
->
in
on
the
price.
supplied
quantity
is
than
price
Theme 1 - PES
Elastic and inelastic supply curves
S
S
Price
Price
quantity supplied
supplied
quantity
Draw and annotate an elastic supply curve
Draw and annotate an inelastic supply curve
In terms of the relationship between price and quantity supplied - goods with an elastic supply curve mean….
when the
change
in
quantity
supplied
is
greater
than the
change in price
In terms of the relationship between price and quantity supplied - goods with an inelastic supply curve mean…
When the
change
in
quantity supplied
lea than the
change
is
in
price.
Mr Wilson’s Thinking Further Challenge
How might PED and PES impact the success of the price mechanism and ultimately the argument for/against a
market free from government intervention?
number
indicate the
PES and PED
Both
of
good
when
or
changel
service
in
demand leads
occur.
price
lower
to
demand. This is
the
buying
comumen in
PED
a
affects
supplied,
aty
consume
supply
on
lower
and PES affects
intervention
market
against
power mainly
units
of
market
the
affect
supply
as
commer's
the
good.
the
of
Theme 1 - PES
Use the formula and your own intuition to calculate the following questions:
1) A firm’s market price increases from £1 to £1.10, and its supply increases from 10m to 12.5m. PES is:
-
-
-
-
/10m) x 100
PES (mm>
=
(
110-1) 11)
x100
2.5
=
2) PES is 2.0 for CDs and the firm supplied 4,000 when the price was £30.
If the price increased from £30 to £36, what will be the new quantity supplied?
-
e
-
-
e
-
-
n
PES
2.0
=
/4000)
x100
(136
30(/30)
-
1/n-4000)/4000)
n
-
4000
2.0
=
x100
x100
40
=
1 600
=
x 5600
=
3) Consider a product that has a supply which is fixed in the short-term, what do you think the supply curve
would look like? Give an example of such a product.
-
land
S
price
4) Consider a product which can immediately respond to any given price change, what do you think the supply
aty supplied
curve would look like? Give a possible example of such a product.
-
-
Price
--
--
I
I
I
I
I
I
I
i
I
1.
Gold
I
-
I
aty supplied
Theme 1 - PES
B
2.
D
3.
B
Theme 1 - PES
There are two main types of factor immobility: occupational and geographical immobility.
Occupational immobility: occurs when there are barriers to the mobility with regards to any of the factors of
production between different sectors of the economy. For example, workers may not have the skills to switch from
the mining sector to the banking sector (structural unemployment). Or capital may be so specialised in one sector,
such as a nuclear reactor, that it cannot be used/adapted in a different sector like a book publisher.
Geographical immobility: refers to barriers people moving from one area to another to find work. This could due to
simple large distances, or it could be due to family ties, differences in house prices or lack of transportation.
4.
A
5.
D
6.
D
Theme 1 - PES
Factors impacting price elasticity of supply
PES Factors
Question
Scarcity of raw
materials or land
(factor or
production).
Explain how scarcity impacts
upon PES. Can you give an
example of a good that
requires a scarce raw material
in its production and is
therefore inelastic?
Explain why agricultural
goods are inelastic during
some periods of the year and
elastic during others.
The length of time it
takes to produce a
product.
Stocks of finished
products and
components: Some
goods are easier and
more practical to
store.
Why might a product be
difficult to store? How could
this problem be combatted by
a firm? What are the
problems with your solution
to this problem?
How easily resources
can be used
transferred to
making other
products.
Outline two goods in which it
would be difficult to switch
resources from producing one
to the other. Explain this
problem in terms of
opportunity cost.
Factor immobility –
when the factors of
production are
available, but
cannot get to where
they are required.
If a firm located itself in the
mountains, why might land,
labour and capital be difficult
to acquire? How might high
house prices create
immobility in terms of
labour?
Answer
reduces
Scarcity
be low.
For
raw material and therefore
the
scarce
requires
example jewelry
raw
PES would
materiall
and the refore inelastic.
Due
weather condition the
supply is unitable.
to
of
goods,
so
is harder
to
elastic. However when it
it is
and there
are
grow
goods
len
not
the
available. Due to
scarcity
fruits and vegetables
be combated
cost
to
There
stored for
a
long period
substitutes available
mountains
and
to travel
as
capital
it is
well
more
as
to
place. Aho
consuming
in the
difficult
move
the
to
time
as
harder
is
it is allo
to
build the
well. Increased price
would increase the
living
h ome
of
employees,
the
of
cost
have to travel
longer
reach
to
work.
In the long-run,
supply for goods
tends to be more
elastic.
In relation to oil, explain why
oil might be more PES elastic
in the long-run, as opposed to
PES inelastic in the short-run.
What might happen? Why
might wheat also be inelastic
in the SR?
They
increase
demotivate worken
It
so
shifts.
could do this
This would
might
run
by adding more work
but
the
production during the work time,
to
work
longer hours.
out and become
it is inelastic. However there
available to
oil so it
replace
demanded and price elactic
more
are
might
in the
as
is
there
the
of
good
plentiful
good,
it
b ecomes
it
product. Some goods
oft he
it
c an
easily
refrigerated place. However
cooled
there goods.
Transportation
more
in
them
by storing
n ature
the
to
a
gold jewelry
are no
produce
land
store due
buinen.
the
Petrol and
to
hard to
be
cannot
goods mightbe
Some
they
How could a firm solve the
problem of having a
low-production capacity?
Suggest one reason the firm
would want to do this and
one reason why they
wouldn’t.
season
t hat
particular
of
inclactic
and would
Spare production
capacity left within a
firm.
during the
When it is
season
during the
is
scarce
substitutes
be len
long run
be
such as
spoilt. This problem
this method
can
would increase the