price elasticity of supply as economics revision presentation on price elasticity of supply
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Price Elasticity of SupplyAS economics revision presentation on price elasticity of supply
Price Elasticity of Supply
• Price elasticity of supply (Pes) measures the relationship between change in quantity supplied and a change in price.
– When supply is elastic, producers can increase production without a rise in cost or a time delay
– When supply is inelastic, firms find it hard to change their production levels in a given time period.
• 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
Price Elasticity of Supply - Measurement
ES = % change in quantity supplied% change in price
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
What Determines Supply Elasticity?
• Factor substitution possibilities
– Can labour/capital be switched easily when there is a change in demand
• When factor substitution is possible, supply will tend to be elastic
• When factors are highly specialized, substitution may be harder
• Spare production capacity available
– When there is spare capacity, businesses can expand output easily without upward pressure on costs
What Determines Supply Elasticity (2)
• 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
• The time frame allowed
– Momentary period (fixed supply)
– Short run (inelastic supply)
– Long run (elastic supply)
• Artificial limits on supply
– E.g. the impact of patents that limit which firms can supply a product
Applying the Concept of Price Elasticity of Supply
Applying The Concept of Elasticity of Supply (1)
• Seats in a football stadium / theatre / cinema
– Short run capacity of any stadium is more or less fixed
– Long run – expansion of stadium capacity / development of a new ground
• An increase in demand for fresh salmon
– Time lags in the production process – fixed supply available to the market in momentary period (i.e. the daily catch)
– Longer term; change in the number of vessels, length of time at sea
• World supply of oil following a large rise in world demand
– Variable amount of spare capacity among the major oil producers
– Can oil stocks be put onto the market to meet the rise in demand?
– Oil supply might be inelastic if current output is close to capacity
Applying The Concept of Elasticity of Supply (1)
• The supply of drugs required to treat Anthrax
– Short term supply is dependent on stocks of product available
– If stocks are low, supply cannot increase in the short term to meet demand
– Debate over the use of patents and how this limits production in the long run
• 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
Momentary Supply – Price Elasticity = Zero
Quantity Supplied (Qs)
Price (P)
Momentary Supply – Price Elasticity = Zero
Quantity Supplied (Qs)
Price (P)
Momentary Supply
Q1
Momentary Supply – Price Elasticity = Zero
Quantity Supplied (Qs)
Price (P)
Momentary Supply
P1
Q1
D1
Momentary Supply – Price Elasticity = Zero
Quantity Supplied (Qs)
Price (P)
Momentary Supply
P1
Q1
D1
D2
P1
Momentary Supply – Price Elasticity = Zero
Quantity Supplied (Qs)
Price (P)
Momentary Supply
P1
Q1
D1
D2
P1
Increase in price from P1 to P2 does not lead to a change in supply
Short Run Supply
Quantity Supplied (Qs)
Price (P)
Momentary Supply
P1
Q1
D1
D2
P2
Short Run Supply
Short Run Supply
Quantity Supplied (Qs)
Price (P)
Momentary Supply
P1
Q1
D1
D2
P2
Short Run Supply
Q2
P3
Short Run Supply
Quantity Supplied (Qs)
Price (P)
Momentary Supply
P1
Q1
D1
D2
P2
Short Run Supply
Q2
Increase in price from P1 to P2 does lead to a short term expansion in supply
P3
Long Run Supply Response
Quantity Supplied (Qs)
Price (P)
Momentary Supply
P1
Q1
D1
D2
P2
Short Run Supply
Q2
Long Run SupplyP3
Long Run Supply Response
Quantity Supplied (Qs)
Price (P)
Momentary Supply
P1
Q1
D1
D2
P1
Short Run Supply
Q2
Long Run Supply
Q3
P3
Long Term Response to an Increase in Demand
Quantity Supplied (Qs)
Price (P)
Demand
Short Run Supply
P2
P1
Q1 Q2
Long Run Supply
D2
P3
Q3
Longer time frame – supply is more elastic – larger rise in output if price P2 is sustained
Long Term Response to an Increase in Demand
Quantity Supplied (Qs)
Price (P)
Demand
Short Run Supply
P2
P1
Q1 Q2
Long Run Supply
D2
P3
Q3
Longer time frame – supply is more elastic – larger rise in output if price P2 is sustained
Long Term Response to an Increase in Demand
Quantity Supplied (Qs)
Price (P)
Demand
Short Run Supply
P2
P1
Q1 Q2
Long Run Supply
D2
P3
Q3
Longer time frame – supply is more elastic – larger rise in output if price P2 is sustained
Values for price elasticity of supply
• When supply is perfectly inelastic a change in price has no effect on the quantity supplied onto the market
• When supply is perfectly elastic a firm can supply any quantity at the same market price. This occurs when the firm can produce output at a constant cost per unit and it has no capacity limits to its production
• When supply is relatively inelastic a change in demand affects price more than quantity supplied
• When supply is relatively elastic. A change in demand can be met without a change in market price
Differences in Price Elasticity of Supply
Price
Quantity
Price
Quantity
Price
Quantity
Price
Quantity
Inelastic Supply Curve
Perfectly elastic supply An elastic supply curve
Perfectly inelastic supply
Elasticity of supply and changes in market demand
Price
Relatively Elastic SupplySupply responds quickly to a
change in demand
Relatively Inelastic SupplySupply responds less than
proportionately to a change in price
Supply
Supply
Quantity Quantity Q1Q2 Q3
P1
P1
P2
P3
Q1
D3D2D1
P2P3
D3D2
D1
The non-linear supply curve
Price
Quantity
P2
P3
P1
Q2Q1 Q3
P4
P5
Supply
Q4 Q5