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Price Elasticity of Supply (Determinants (Time (The longer the time…
Price Elasticity of Supply
Calculation
PES = % change in Quanitity Supplied / % change in Price
e.g. P for pizza :arrow_up: from €4 to €6 per pizza. Qs :arrow_up: from 2000 to 2,400 pizzas. PES?
(2400-2000 / 2000) / (6-4/4) = 1600 / 4000 = 0.4
Price elastic
PES > 1
% change in Qs > % change in P
PES = the responsiveness of Q supplied to changes in P
Price inelastic
PES < 1
% change in Qs < % change in P
On a diagram, if the S curve crosses the x-axis = INELASTIC
On a diagram, if the S curve crosses the y-axis = ELASTIC
Constant PES
Perfectly elastic
PES = infinity
Perfectly inelastic
PES = 0
Unitary elastic
PES = 1
Determinants
Time
The longer the time producers have to respond to changes in price, the more elastic the supply. If price suddenly changes, in the short term the producer may not be able to obtain all necessary resources and technology in order to increase output
Storage
In the event of an increase in D = P, the storage space can be efficiently used to store additional products to have more available stock. The more elastic the supply
Mobility of FOP's
If FOP's can be easily moved from one type of production to another, supply will be more elastic
Unused capacity of firms
In the event of an increase in D = P, the unused resources (machinery, equipment etc.) can be used to expand production quick. The more elastic the supply
Primary and manufactured commodities
Primary commodities usually have a lower PES than manufactured. This is because, they need more time to produced or extracted thus, the responsiveness to the change in P is slower.
Agriculture, forestry, mining etc. all need time to grow or be obtained
Tax incidence
If PES < PED, the tax incidence is larger on the producer than the consumer (due to the product having a higher PED (luxury))
If PES > PED, the tax incidence is larger on the consumer rather than the producer (due to the product having a lower PED (cigs))