1.2.5 Price Elasticity of Supply (Edexcel)

This study note for Edexcel covers Price Elasticity of Supply

A) Understanding Price Elasticity of Supply (PES)

1. Definition of PES

• Price Elasticity of Supply (PES) measures the responsiveness of the quantity supplied of a good to changes in its price.
• PES helps us understand how much the quantity supplied changes when the price changes.

2. Formula for Calculating PES

• The formula for calculating PES is: PES = (% Change in Quantity Supplied) / (% Change in Price).

B) Use Formula to Calculate Price Elasticity of Supply

Example Calculation:

• Initial quantity supplied = 100 units
• New quantity supplied = 120 units
• Initial price = $10 per unit
• New price = $12 per unit

Using the formula: PES = [(120 - 100) / 100] / [(12 - 10) / 10] PES = (20 / 100) / (2 / 10) PES = 0.2 / 0.2 PES = 1

C) Interpretation of Numerical Values of PES

Perfectly Elastic (PES = ∞):

• In the case of perfect elasticity, even a slight price change results in an infinite change in quantity supplied.
• This is rare and usually occurs in markets where producers can instantly and costlessly adjust production.
• Example: Agricultural goods with perishable crops may exhibit near-perfect elasticity in the short run, as farmers can quickly adjust supply in response to price changes.

Perfectly Inelastic (PES = 0):

• In the case of perfect inelasticity, quantity supplied does not respond to price changes.
• Producers are unable or unwilling to adjust supply in response to price fluctuations.
• Example: Life-saving medications may have perfectly inelastic supply; their production cannot be immediately increased, regardless of price changes.

Relatively Elastic (PES > 1):

• In relatively elastic supply, a percentage change in price results in a larger percentage change in quantity supplied.
• Producers can respond to price changes by adjusting production.
• Example: The supply of luxury cars may be relatively elastic, as manufacturers can increase production in response to higher prices.

Relatively Inelastic (0 < PES < 1):

• In relatively inelastic supply, a percentage change in price results in a smaller percentage change in quantity supplied.
• Producers have limited flexibility to adjust supply quickly.
• Example: The supply of antique collectibles may be relatively inelastic, as it is difficult to increase production quickly in response to price changes.

D) Factors Influencing Price Elasticity of Supply

• Time Horizon: In the short run, supply may be less elastic as it takes time to adjust production capacity. In the long run, supply can be more elastic as firms can make capital investments to expand capacity.
• Resource Availability: The availability of resources, such as skilled labor or raw materials, can influence supply elasticity. Limited resources may result in less elastic supply.
• Production Technology: The ease with which production can be scaled up or down influences elasticity. Advanced technology can make supply more elastic.
• Perishability: Goods with short shelf lives tend to have more elastic supply in the short run, as producers can quickly adjust to changing demand.

E) The Distinction Between Short Run and Long Run

• Short Run: The short run refers to a period during which some factors of production, such as plant capacity or labor, are fixed and cannot be adjusted. Supply may be less elastic in the short run.
• Long Run: The long run is a period during which all factors of production can be adjusted. Firms can expand or contract production capacity. Supply can be more elastic in the long run.

Significance for Elasticity of Supply:

• In the short run, supply may be less responsive to price changes due to limited flexibility in adjusting production levels.
• In the long run, firms have more options to adjust production capacity, making supply more responsive to price changes.

Understanding PES, its calculation, interpretation, and the factors influencing it, along with the distinction between short run and long run, is crucial for analyzing how firms respond to price changes and make decisions about production levels in different time frames.