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Unit 12: Price elasticity of supply - Coggle Diagram
Unit 12: Price elasticity of supply
Definition
: measure the degree of responsiveness of quantity supplied of product after a change in it market price (supplier/producers)
Formula
to calculate PES:
percentage change in quantity supplied :heavy_division_sign: percentage change in price
Interpreting supply diagrams & price elasticity of supply
diagram (pg 58 & 59)
PES:
PES greater than 1 => price elastic
PES less than 1 => price inelastic
PES equal to 0 => perfectly price inelastic (concert ticket, limited bag)
PES equal to infinity => perfectly price elastic (water, electricity)
PES equal to 1 => unitary price elasticity
DETERMINANTS of PES:
Degree of spare productive capacity:
if firm has plenty of spare capacity then it can increase supply with ease without increasing cost of production
in contrast if firm has no or low spare capacity => price inelastic
Level of stocks:
if firm has unused raw material, components & finished products that are available for use -> firm able to respond quickly to changes in price as it can increase supply & also supply stock to market => price elastic
Number of producer in industry:
More suppliers of products in an industry, the easier it is for firms to increase their output in response to a price increase => price elastic
hence, greater number of firms -> more price elastic supply tend to be
in contrast, if there is high barriers to enter an industry, means there are few supplier/ firms so supply tend to be inelastic
Time period:
in the short run, most firms/ producers are not able to change their factor of production( labour, land, capital) such as size of workforce & amount of capital they employ => supply tend to be inelastic as supply is less responsive
supply tend to be more price elastic in the long run as firms can adjust their factor input/ factor of production according to changes in market price
Ease & cost of factor substitution:
if firm can easily substituted their factor of production (capital & labour-> often mobile) => supply tend to be price elastic
for example, capital is often mobile in publishing company, as they can switch between printing magazines, textbooks, calendar and more
in contrast PES for a product where factor of production cannot be easily switched as production process is inflexible => price inelastic
Importance of PES for decision makers:
Producer would want their products to become more elastic which can help them to become more competitive therefore can generate more sales revenue & profits
Producers can: (ESSAY)
Create space capacity
Keep a large volume of stock (inventories)
Improve their storage systems to continue the shelf-life products (length of time of product can be stored without becoming unsuitable for consumption)
Adopt/ upgrade to latest technology
Improve distribution system (how product reach customer
Develop & train employee to improve labour occupational mobility (perform range of jobs/tasks)
For government:
PES for housing market:
inelastic supply of new housing in response to rising demand for housing results in high property prices --> can widen the wealth gap between those who can afford house & those who are unable to
therefore, gov. need to intervene in market to ensure everyone can access to affordable housing
PES for labour market:
key factor explaining differences in wages
gov. may seek to encourage inflow migrants workers to help relieve shortage of labour & improve PES in labour market
Price inelastic
supply: firms/ producers find it difficult to change production in given time due to a change in market price
Price elastic
supply: firms/ producers can easily increase supply without time delay if there is an increase in market price