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Elasticity Concepts Price Elasticity of Supply & Effects of PED and…
Elasticity Concepts
Price Elasticity of Supply
& Effects of PED and PES
Definition
Degree of responsiveness of QS of good to change in own P, cp
PES = (%:arrow_up_small:QS)/(%:arrow_up_small:P) = (:arrow_up_small:QS/:arrow_up_small:P)(P/QS)
Always + as P&QS change in same direction (law of supply)
Magnitude
Price Inelastic
PES<1, curve cuts horizontal axis
Price Elastic
PES>1, curve cuts vertical axis
Determinants of PES
(SNIT)
Existence of
Spare Capacity
Can :arrow_up:production quickly-> price elastic
New/expanded capacity shifts S curve right, not= spare capacity
Nature of Production
Resource mobility
determines ease of factor substitution
produce range of products-> can switch machines, labour etc from one type of production to another
Length
of production period
Shorter-> can :arrow_up:production quickly, more price elastic
Ease of Accumulating
Inventories
/Stocks
goods produced but not yet on sale, not in current market S
easy to store stocks at low cost-> can run down stocks to meet sudden :arrow_up:D or take S off market when :arrow_down:D -> elastic
Time
Period
hard to :arrow_up:QS in short run due to lack of space capacity, resource immobility, inadequate stocks-> generally inelastic in short run
Applications
Firms/Producers:
output decisions
:arrow_up:output before anticipated :arrow_up:D for very price inelastic goods
Gov:
buffer stock schemes
to stabilise P and producers' income
S price inelastic for most primary production
->significant fluctuations in market P when D changes
Effects of
PED & PES
Shift D with diff. PES
Market P for goods with price inelastic S tends to :arrow_up sharply when D:arrow_up:, while market output:arrow_up: insignificantly in short run
S2(elastic) is possibly S curve for goods with price inelastic S in long run
Shift S with diff. PED
P:arrow_up: more substantially in case of price inelastic D while output:arrow_down: less substantially
D2(elastic) possibly D for goods with price inelastic D, in long run
Effect of PED on consumer expenditure
-under Applications of PED: Firms: Pricing Strategies