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Price elasticity of supply
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Price elasticity of supply (PES) measures how quickly and how much producers can change output when price changes.
The formula
PES = % change in quantity supplied ÷ % change in price
PES is usually positive, because price and quantity supplied move in the same direction.
Example: price rises 10%, quantity supplied rises 5%. PES = 5 ÷ 10 = 0.5 (inelastic).
PES is usually positive, because price and quantity supplied move in the same direction.
Example: price rises 10%, quantity supplied rises 5%. PES = 5 ÷ 10 = 0.5 (inelastic).
Interpreting PES
0: perfectly inelastic. Between 0 and 1: inelastic. 1: unitary. Greater than 1: elastic. Infinity: perfectly elastic.
What affects PES
Availability of factors of production (workers, materials).
Availability of stocks (inventory) to sell.
Spare capacity in factories.
Time: supply is more elastic in the long run.
Manufactured goods tend to have more elastic supply. Primary products such as crops are often inelastic in the short run because they take time to grow.
Availability of stocks (inventory) to sell.
Spare capacity in factories.
Time: supply is more elastic in the long run.
Manufactured goods tend to have more elastic supply. Primary products such as crops are often inelastic in the short run because they take time to grow.
The price of wheat rises by 25%, but farmers can only raise output by 5% this year. Find PES.
- PES = 5 ÷ 25
Answer: 0.2, inelastic
PES = %ΔQs ÷ %ΔP (positive). More than 1: elastic; less than 1: inelastic. Spare capacity, stocks, available factors and time make supply more elastic. Primary products are often inelastic in the short run.
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