Price Elasticity of Supply

1. Price Elasticity of Supply You should be able to; • Define price elasticity of supply (PES), give the equation, explain the possible range of values, explain the determinants of PES, and show all of the above in diagrams

2. On your whiteboards… • Go to the website www.fairtrade.org.uk • Find out 5 things this British organisation does to empower workers around the globe.

4. Price Elasticity of Supply • Price elasticity of supply measures the responsiveness of the quantity supplied of a good to a change in its price in a given time period • Formula for calculating elasticity of supply (Pes) • % change in quantity supplied divided by the % change in price • Normally as price rises - so does supply (as higher prices send the signal to producers of a rise in potential profits) • So price elasticity of supply (PeS) will have a positive co-efficient • We are mainly concerned with the ability of a business to alter supply to meet changes in market demand

5. % change in quantity supplied ES = % change in price Price Elasticity of Supply - Measurement 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

6. 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 factor inputs available, businesses can expand output easily without pressure on costs to rise • Stocks (inventories) available to meet changes in demand • A low level of stocks makes supply relatively inelastic • When stocks can be off-loaded onto the market, supply is elastic • Time frame allowed for the supply to come to the market • 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. Would the producers of these products be responsive to changes in price? Explain your reasoning… 1. 2.

8. Would the producers of these products be responsive to changes in price? Explain your reasoning… 3. 4. This company also makes staples, drawing pins and tacks

9. Would the producers of these products be responsive to changes in price? Explain your reasoning… The factory is working at full capacity! 5. 6.

10. Now let go back and think about the PED of these products in Malaysia… • For each product, discuss the PED and draw a graph for each which shows your estimated slope of the supply and demand. Label the graph correctly.

11. Applying The Concept of Elasticity of Supply • 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 • 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