Price Elasticity of Supply

Price Elasticity of Supply

1. PRICE ELASTICITY OF SUPPLY= the responsiveness of supply to changes in the price level

2. Price elasticity of supply= % change in quantity supplied / % change in price

   • above 1= price elastic supply
     • e.g. pencils (you can easily produce a lot more)
   • below 1= price inelastic supply
     • e.g. agricultural products (because they have a long growing cycle), often comodoties

3. Factors affecting price elasticity of supply

   • Time
     • how quickly can suppliers respond to a change in price? (if commodities then probably a long time, so price inelastic supply)
   • Raw Materials
     • Some raw materials may be very scarce e.g. oil so it could be difficult to increase supply quickly when more oil needs to be found first
   • Availability of stock or stock-pilling
     • Suppliers with stocks of finished goods can respond quickly, provided products are not perishable
   • Ease of switching between alternative production
     • if suppliers can move production from one item to another they can respond quickly (e.g. printing football T-shirts for different clubs)
   • availability of spare capacity
     • Can expand output more easily so would have price elastic supply
   • number of firms and ease at which new firms can enter the market
     • new resources could easily enter a market so it would be price elastic supply if new firms could easily enter
   • ability to alter production methods
     • if firms can quickly transfer to different methods they could increase output easily (e.g. more capital intensive production)

4. COMMODITY= a good that is traded, but usually refers to raw materials or semi-manufactured goods that are traded in bulk such as tea, iron ore, oil or wheat. Often they are unbranded goods (homogeneous) where all firms' products are bery similar and undistinguishable from each other.

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