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Price Elasticity of Supply - Coggle Diagram
Price Elasticity of Supply
Definitions
Price elasticity of supply refers to the degree of responsiveness of the quantity supplied of a good to a change in the price of the good, ceteris paribus. It is % change in quantity supplied over % change in price
Sign and values of PES
The sign of PES is positive due to the positive relationship between price and quantity supplied of a good, as reflected by the law of supply.
values of PES
Perfectly price inelastic
PES value is 0. When the supply of the good is perfectly price inelastic, any change in the price of the good does not bring about any change in the quantity supplied of the good.
Perfectly price elastic
When the supply of the good is perfectly price elastic, producers can sell all they have or none at all, even with a slight change in price of the good. This is because firms can supply the good at a constant price per unit and has nocapacity limit to its production.
Price inelastic
PES value is between 0 and 1. when the supply of a good is price inelastic, a change in the price of the good leads to a less than proportionate change in quantity supplied of the good.
Unitary price elasticity
W hen the supply of a good is unitarily price elastic, a change in price of the good leads to a proportionate change in quantity supplied of the good.
Price elastic
When the supply of a good is price elastic, a change in price leads to a more than proportionate change in the quantity supplied of the good.
Factors affecting PES
Time period
Market period
The market period refers to the period in which the producers are unable to respond to a change in the price or the demand for the good. This is because all factors of productions are fixed and whatever the price of the good, producers are willing and able to offer for sale the same amount of the good. Thus, supply is said to be perfectly price inelastic.
short run period
The short run period refers to the period where at least 1 factor of production is fixed. supply can be increased by increasing the variable factor. supply of the good is still relatively inelastic as it is constraint by the fixed factor. Thus, when there is an increase in price of the good leads to a less than proportionate change in quantity supplied.
Long run period
The long run period is where there is sufficiently long time for firms to make the desired resource adjustments. All factors of production are variable and in the long run, supply tends to be more responsive to a change in price of the good as all factors are variable.
Mobility of factors of production
The mobility of factors of production refers to the ease at which factors of production can move from 1 use to another use. Supply is more price elastic as with high factor mobility firms can gain quick access to the factors of production when there is a need to ramp up production.
Availability of spare capacity
If there is plenty of spare capacity, the firm will be able to increase production without causing a rise in cost of production, thus the supply is more price elastic as supply is more responsive to an increase in demand of the good.
Ability to store stocks
If the good can be stored without a loss in quality, then supply tends to be more price elastic as quantity supplied changes by a large amounts in response to a change in price of the good.
Rate at which cost increases
If there is lesser additional cost in producing additional output, then firms will be more encouraged to increase the supply of the good given a price rise, allowing supply to become more price elastic.