1.2.5 Unit content
Students should be able to:
• Define price elasticity of supply
• Calculate and interpret numerical values of
price elasticity of supply (perfectly and
relatively elastic, perfectly and relatively
inelastic)
• Analyse factors that influence price elasticity
of supply
• Distinguish between the short run and long
run and assess its significance to price
elasticity of supply
Price elasticity of supply
Price elasticity of supply (PeS) refers to the
responsiveness of supply to changes in
price.
The formula is:
PeS = % change in quantity supplied
% change in price
We know that as the price rises, firms want
to supply more, but how much more?
Inelastic versus elastic PeS
As before, the answer shows the degree to
which supply is elastic.
Answers below 1 are said to show price
inelastic supply.
Answers above 1 indicate supply is more
price elastic.
When does unitary elasticity occur?
Note that answers are always positive.
Why?
Drawing PeS
Draw an elastic supply curve
Draw an inelastic supply curve
Uses for PeS
PeS is used to explain why prices rise or
fall quite dramatically (or not) when there
are changes in demand.
E.g. if there was a sudden increase in
demand for tomatoes, why would supply be
unresponsive?
So what can you conclude about the price
elasticity of supply of tomatoes?
PeS and commodities
What are commodities? Give examples
What can you say about the elasticity of
supply of oil in the short term? Why?
However, what might happen if firms have
stock-piled raw materials?
Factors affecting PeS
Perfectly inelastic supply curves
Perfectly inelastic supply curves mean that
supply cannot increase even when price
rises (especially in the short term).
E.g.
The short run and the long run
It may be more feasible for firms to change
their supply in the long run rather than in
the short run. Why?
Definition of the short run and the long run
The short run is defined as a period in
which the firm is not able to vary its inputs
of all factors of production. E.g. it may not
be possible to ___________ a new factory.
The long run is defined as the period when
all factors may be varied.
Note that __________ is often quite easy to
vary whereas __________ inputs such as
buildings take more time.
Special cases – perfectly inelastic
It may be that supply is fixed, so regardless
of how much price increases, firms will not
be able to supply any more.
E.g.
Equally, why may producers sell regardless
of how low the price?
Special cases – perfectly elastic
The other extreme is where firms would be
prepared to supply any amount of a good at
the going price.