Price elasticity of supply   Price elasticity of demand   Economicstutor..com.au

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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix


Price elasticity of supply


The price elasticity of supply (PES) refers to the responsiveness of total quantity supplied of a product to a change in the price of that product.  The PES determines the slope or gradient of the supply curve, with slope flattening out as the PES increases and the slope steepening as the PES falls.  The PED can be mathematically calculated between any two points along a firm’s supply curve using the formula:


PES = % change in quantity supplied/% change in Price


The higher is the PES, the greater is the responsiveness of QS to a change in P.  This will be represented by a supply curve that is relatively flat, highlighting that any increase in the price of the product will result in a more than proportional increase in the QS.  For example, if the price of tinned tomatoes increases by 10% and the responding increase in supply is 20%, then the the PES is high.


The lower is the PES, the smaller is the responsiveness of QS to a change in P.  This will be represented by a supply curve that is relatively steep, highlighting that any increase in the price of the product will result in a less than proportional increase in the QS. For example, if the price of fresh tomatoes increases by 10% and the responding increase in supply is 7%, then the the PES is low.


Factors affecting price elasticity of supply


Production period


If prices increase for a particular product this will give signals to suppliers that allocating resources into the area may now be more profitable. Firms may wish to increase their supply, but it will take time to shift resources from the production of other goods and services. If there is an increase in the demand for apples, the demand curve will shift to the right, resulting in a higher price. The higher price will therefore act as an incentive for more apples to be grown. Unfortunately they cannot be instantly produced and require growing and harvesting. As a result, the PES will be low in the short term but will increase over time as more resources can be shifted into their production.


Spare capacity


If a firm has spare capacity then it is more likely to be able to respond to changing prices. There may be idle labour which can work more hours and machinery can be utilised to increase supply quickly. If the industry is running at capacity and there are skills shortages, making it hard to attract labour to expand operations, the PES will tend to be relatively low. Over a period of time the firm may be able to increase their productive capacity by greater investment in plant and machinery and/or measures that work to attract new labour.  


Durability of goods


If the goods can be stored, then it will be much easier to respond to changing prices. The supplier can simply access the inventory that has been stored. Many firms face higher costs from storage however, which may limit their ability to respond to more profitable price levels. Food products tend to have a low price elasticity of supply in the short run as they have a limited storage life. Canned products, such as softdrinks, however, may be stored for extended periods. Therefore, if there was a sudden increase in demand (which resulted in higher prices), the supplier could simply access any inventory that is available and reap the rewards.





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