Price Elasticity of Supply

Price Elasticity of Supply

This measures the % change in QS after a change in Price
PES = % change in QS
% change in Price

Inelastic Supply.

This means that an increase in price leads to a smaller % change in demand Therefore PES <1

Supply could be inelastic for the following reasons

1. Firms operating close to full capacity.
2. Firms have low levels of stocks, therefore there are no surplus goods to sell
3. In the Short term, capital is fixed in the short run e.g. firms do not have time to build a bigger factory.
4. If it is difficult to employ factors of production, e.g. if highly skilled labour is needed
5. With agricultural products supply is inelastic in the short run, because it takes at least 6 months to grow crops, in Sep the farmer cannot suddenly produce more potatoes if the price goes up
Elastic Supply

· This occurs when an increase in price leads to a bigger % increase in supply, therefore PES >1

Supply could be elastic for the following reasons:

1. If there is spare capacity in the factory
2. If there are stocks available
3. In the long Run supply will be more elastic because capital can be varied
4. If it is easy to employ more factors of production
Question on Price Elasticity of Supply Equation

PES is 2.0 for CDS: and the firm supplied 4,000 when the price was £30.

Q. If the price increased from £30 to £36, what will be the new Q?
QS increases by 6, therefore as a % 6/30 = 0.2 = 20%
2.0 = % change in QS /20
40 = % change in QS
Therefore new Q = 4000 *140/100 = 5,600