Price elasticity of Supply Unit 9 Price elasticity of Supply

Definition of Price Elasticity of Supply (PES) PES measures the extent of changes in supply, as a result of a change in price. It is measure of responsiveness of supply to a change in price. PES = Percentage change in quantity supplied Percentage change in price Abbreviation: PES = %Δ QS %ΔP

Calculating PES Percentage change in price is: Change in price PES = Percentage change in quantity supplied Percentage change in price Percentage change in quantity supplied is: Change in quantity supplied Original quantity supplied Percentage change in price is: Change in price Original price

Interpretation of PES PES is a positive figure, because supply and price are moving in the same direction. Higher this figure is, the greater the responsiveness of supply is. PES of 3, means, the quantity supplied will change for 3% when price changes for 1%. Increase in price lead to increase in supply.

Elastic and Inelastic Supply Elastic supply means that supply changes by a greater percentage than the change in price. In this case, size of PES is more then 1, but less than infinity. ∞ > PES > 1 Inelastic supply means that supply changes by a smaller percentage than the change in price. PES for inelastic supply is less then 1, but greater than zero. Means: 1 > PES > 0

Elastic supply is represented by shallow (flat) supply curve. Price S P1 P S Quantity supplied Q1 Q

Inelastic supply is represented by steep (sharp) supply curve. Price S P1 P S Quantity supplied Q Q1

Factors determining the degree of Elasticity 1. The time taken to produce it The cost of altering its supply Feasibility of storing it

Degrees of Elasticity I Perfectly elastic supply PES= ∞ (change in price causes a complete change in quantity supplied) II Elastic supply ∞ > PES > 1 III Unit elasticity of supply PES=1 (percentage change in price results in an equal change in supply) IV Inelastic supply 1 > PES > 0 V Perfectly inelastic supply PES=0 (change in price does not causes any change in quantity supplied)

Changes in PES Supply will be more elastic as the time pass by. Producers will be able to adjust more if they have enough time. Improvements in technology: if they have better technology, they can reduce time of production, costs of production. This changes will speed the time of switching from one to another product, or increase the quantity of original one. Producers tend to make their production more elastic. This will increase their profit and make them more flexible to the changes on the market.