Price Elasticity of Supply

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Unit 1 Micro Revision

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Price Elasticity of Supply

  1. 1. Unit 1 Micro Price Elasticity of Supply
  2. 2. Diagrams matter! Diagram must haves Fully labeled Original and new equilibrium Demand and supply the correct way round Well explained – you must explain why the curve has shifted, in detail Think about the elasticity – e.g. oil has inelastic demand and supply
  3. 3. Price elasticity of supply
  4. 4. Elasticity of Supply • Price elasticity of supply (Pes) measures the relationship between change in quantity supplied and a change in price. • (1) When supply is elastic, producers can increase production without a rise in cost or a time delay • (2) When supply is inelastic, firms find it hard to change their production levels in a given time period
  5. 5. Formula for Price Elasticity of Supply • The formula for price elasticity of supply is: • Percentage change in quantity supplied divided by the Percentage change in price • The co-efficient of elasticity of supply is positive, because an increase in price is likely to increase the quantity supplied to the market
  6. 6. PES Co-efficient ES > 1 price-elastic supply ES = 1 unit-elastic supply ES < 1 price-inelastic supply Es = 0 perfectly inelastic supply Es = infinity perfectly elastic supply
  7. 7. Elastic supply (PES > +1) Price S1 P2 P1 D1 Q1 Q2 D2 Output
  8. 8. Inelastic supply (PES < +1) S1 Price P2 P1 D1 Q1 Q2 D2 Output
  9. 9. Price elasticity of supply The market for tractors is supplied by two firms, X and Y, each initially having 50 % of the market. A 10 % increase in the price of tractors leads to an increase in output from firm X of 10 % and from firm Y of 20 %. What is the price elasticity of supply of tractors in this market?
  10. 10. Price elasticity of supply The market for tractors is supplied by two firms, X and Y, each initially having 50 % of the market. A 10 % increase in the price of tractors leads to an increase in output from firm X of 10 % and from firm Y of 20 %. What is the price elasticity of supply of tractors in this market? Price change = 10%, total output change is 15% Therefore the price elasticity of supply = +1.5
  11. 11. Elasticity of supply
  12. 12. When demand for a good increases, equilibrium price stays the same. What is the elasticity of supply? Sketch this situation in the supply and demand diagram on the left (below) Price Price D1 D2 Quantity Quantity
  13. 13. When demand for a good increases, equilibrium price stays the same. What is the elasticity of supply? Sketch this situation in the supply and demand diagram on the left (below) Price Price P1 S1 D1 D2 Quantity Quantity
  14. 14. When there is an increase in demand for a product, the rise in equilibrium price is large but the expansion in quantity produced is small. What is the elasticity of supply? Sketch the situation in the supply and demand diagram on the right (below) Price Price P1 S1 D1 D2 Quantity D1 D2 Quantity
  15. 15. When there is an increase in demand for a product, the rise in equilibrium price is large but the expansion in quantity produced is small. What is the elasticity of supply? Sketch the situation in the supply and demand diagram on the right (below) Price Price P1 S1 S1 D1 D2 Quantity D1 D2 Quantity
  16. 16. When there is an increase in demand for a product, the rise in equilibrium price is large but the expansion in quantity produced is small. What is the elasticity of supply? Sketch the situation in the supply and demand diagram on the right (below) Price Price P1 S1 S1 P1 D1 D2 Quantity D1 Q1 D2 Quantity
  17. 17. When there is an increase in demand for a product, the rise in equilibrium price is large but the expansion in quantity produced is small. What is the elasticity of supply? Sketch the situation in the supply and demand diagram on the right (below) Price Price S1 P2 P1 S1 P1 D1 D2 Quantity D1 Q1 D2 Q2 Quantity
  18. 18. Factors affecting PES • Factor substitution possibilities following a change in demand for the product – When factor substitution is possible and can be achieved at low cost, supply will be elastic – When factors are highly specialized, substitution may be harder and thus supply will be inelastic A good example is the alternative uses to which farm land can be put when demand conditions change – the time lag in switching production from one crop to another
  19. 19. Factors affecting PES • Spare production capacity available • When there is spare capacity, businesses can expand output easily to meet rising demand without upward pressure on costs
  20. 20. Factors affecting PES • Stocks (inventories) available to meet demand • A low level of stocks makes supply inelastic in the short term • When stocks can be released onto the market, supply is elastic A high level of inventory (stocks) means that fresh supplies can be taken to market quickly – supply will be elastic
  21. 21. Factors affecting PES • The time frame allowed – 1/ Momentary period (fixed supply) – 2/ Short run (inelastic supply) – 3/ Long run (elastic supply) • Artificial limits on supply – E.g. the impact of patents that limit which firms can supply a product
  22. 22. Give three reasons why an industry’s supply curve might be price elastic in the short term Spare capacity High stock levels Short production times
  23. 23. Inelastic supply of new housing • The supply of new housing – Planning permission + availability of land to develop + shortages of skilled labour – Time lags in the production process – new housing developments take months to complete
  24. 24. Supply elasticity factors Temporary workers can help to relieve shortages of labour and improve the elasticity of supply
  25. 25. Supply elasticity factors Temporary workers can help to relieve shortages of labour and improve the elasticity of supply In many agricultural markets, the delay between planting and harvesting makes supply inelastic in the momentary period

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