P R I C E E L A S T I C I T Y O F S U P P LY ( P E S )

ELASTICITY OF SUPPLY

FORMULA AND DEFINITION

•Price elasticity of supply is a measure of how much the supply of a product changes when there is a change in the price of the product.

• PES = percentage change in quantity supplied of the product percentage change in price of the product

THE RANGE OF VALUES OF PES

• The range of values is from zero to infinity.

PES is perfectly inelastic when the value is zero. PES is inelastic when the value is between zero

and 1. (a change in price will lead to a less proportionate change in the quantity supplied of it)

PES is unitary when the value is 1. PES is elastic when the value is between 1 and

infinity. (a change in price leads to greater than proportionate changes in the quantity supplied of it)

PES is perfectly elastic when the value is infinity.

THE RANGE OF VALUES OF PES

THE RANGE OF VALUES OF PES

DETERMINANTS OF PES

1. how much costs rise as output increases – if total costs rise significantly as a producer attempts to increase supply, then supply will not be raised and so supply will be relatively inelastic

2. the time period being considered – the longer the time period being considered, the more elastic will be the supply of a product. In the immediate time period, PES will be perfectly inelastic. In the short run, as firms can change variable factors, PES will become more elastic. In the long run, when firms can change all factors, PES will be even more elastic.

3. the ability to store stock (inventories)

INTERNATIONAL TRADE AND COMMODITIES

• Commodities are another word for raw materials such as cotton or coffee. • Commodities tend to have inelastic supply

because:• they are necessities to the consumers(manufacturers)

who buy them and they have few or no substitutes. • a change in price cannot lead to a proportionately large

increase in quantity supplied because of time to grow the raw material or re-allocate resources to production.

• Similarly, if there was a fall in price then the quantity supplied would not adjust accordingly since the crop has already been harvested.

PRICE ELASTICITY FOR COMMODITIES

A combination of relatively inelastic demand and inelastic supply for commodities mean that any changes in the demand or supply of a commodity will result in large swings in prices.

• Remember copper in Chapter 3 – changes of 150% within 2 years.

• In the case of copper, the supply is inelastic due to the high costs and time involved in changing supply when prices change.

THE HOMEWORK

For MONDAY• Page 61 • Examination Questions• Paper 1, part (a) questions 1

and 2

• STUDY FOR QUIZ! -all notes and homework on Elasticity!

• The next quiz will be IB Questions and IB Grading.

• READ ASSESSMENT ADVICE!