Price Elasticity of Supply. IGCSE Economics
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1 Price Elasticity of Supply IGCSE Economics
2 Price 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.
3 Measuring 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
4 Price Elasticity of Supply - Measurement E S = % change in quantity supplied % change in price E S > 1 E S = 1 E S < 1 Es = 0 price-elastic supply unit-elastic supply price-inelastic supply perfectly inelastic supply Es = infinity perfectly elastic supply
5 What Determines Supply Elasticity? Factor substitution possibilities Can labour or capital inputs be switched easily when there is a change in demand? 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 Spare production capacity available When there is spare capacity, businesses can expand output easily to meet rising demand without upward pressure on costs
6 What Determines Supply Elasticity (2) Stocks (inventories) of finished products and raw materials 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
7 Using the idea of elasticity of supply What will determine the elasticity of supply of ipods and ipod nanos? What about the elasticity of supply of tunes downloaded from itunes?
8 Applying the idea of Elasticity of Supply
9 Applying The Concept Seats in a football stadium / theatre / cinema Short run capacity of any stadium is more or less fixed Long run allows for the expansion of stadium capacity / development of a new ground An increase in demand for fresh salmon Time lags in the production process e.g. a fixed supply available to the market in momentary period (i.e. the daily fish catch) Longer term; change in the number of vessels, length of time at sea
10 Oil and elasticity of supply 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
11 Elasticity of 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
12 Momentary Supply Price Elasticity = Zero Price (P) Quantity Supplied (Qs)
13 Momentary Supply Price Elasticity = Zero Price (P) Momentary Supply Q1 Quantity Supplied (Qs)
14 Momentary Supply Price Elasticity = Zero Price (P) Momentary Supply D1 Q1 Quantity Supplied (Qs)
15 Momentary Supply Price Elasticity = Zero Price (P) Momentary Supply D2 D1 Q1 Quantity Supplied (Qs)
16 Momentary Supply Price Elasticity = Zero Price (P) Momentary Supply Increase in price from to P2 does not lead to a change in supply D2 D1 Q1 Quantity Supplied (Qs)
17 Short Run Supply Momentary Supply Price (P) Short Run Supply P2 D2 D1 Q1 Quantity Supplied (Qs)
18 Short Run Supply Momentary Supply Price (P) Short Run Supply P2 P3 D2 D1 Q1 Q2 Quantity Supplied (Qs)
19 Short Run Supply Momentary Supply Price (P) Short Run Supply P2 P3 Increase in price from to P2 does lead to a short term expansion in supply D2 D1 Q1 Q2 Quantity Supplied (Qs)
20 Long Run Supply Response Momentary Supply Price (P) Short Run Supply P2 P3 Long Run Supply D2 D1 Q1 Q2 Quantity Supplied (Qs)
21 Long Run Supply Response Momentary Supply Price (P) Short Run Supply P3 Long Run Supply D2 D1 Q1 Q2 Q3 Quantity Supplied (Qs)
22 Long Term Response to rising Demand Price (P) Short Run Supply P2 P3 D2 Long Run Supply Longer time frame supply is more elastic larger rise in output if price P2 is sustained Demand Q1 Q2 Q3 Quantity Supplied (Qs)
23 Long Term Response to rising Demand Price (P) Short Run Supply P2 P3 D2 Long Run Supply Longer time frame supply is more elastic larger rise in output if price P2 is sustained Demand Q1 Q2 Q3 Quantity Supplied (Qs)
24 Long Term Response to rising demand Price (P) Short Run Supply P2 P3 D2 Long Run Supply Longer time frame supply is more elastic larger rise in output if price P2 is sustained Demand Q1 Q2 Q3 Quantity Supplied (Qs)
25 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
26 Differences in Price Elasticity of Supply Price Perfectly elastic supply Price An elastic supply curve Price Perfectly inelastic supply Quantity Price Quantity Inelastic Supply Curve Quantity Quantity
27 Elasticity of supply & changes in demand Relatively Elastic Supply Supply responds quickly to a change in demand Relatively Inelastic Supply Supply responds less than proportionately to a change in price Price Supply Supply P2 P3 P2 P3 D1 D2 D3 D1 D2 D3 Q2 Q1 Q3 Quantity Q1 Quantity
28 Supply elasticity Migrant 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 very inelastic in the momentary period
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