Price Elasticity of Supply
AS Economics
Aims and Objectives
Aim: Level Understand price elasticity of supply Objectives: Define price elasticity of supply Calculate price elasticity of supply Analyse how price elasticity of supply can differ in the short run to the long run.
E-D C-B B-A*
Starter
If the price of football shirts rises to 49.99 will firms supply more or less of them immediately?
If the demand for cucumbers rises 50% will firms supply more or less of them immediately?
Price Elasticity of Supply
Price elasticity of supply (Pes) measures the relationship between change in quantity supplied and a change in price.
Price Elasticity of Supply
1) When supply is elastic, producers can increase production without a rise in cost. 2) When supply is inelastic, firms find it hard to change their production levels in a given time period
Price Elasticity of Supply
Pes = % change in quantity supplied --------------------------------% change in price
Price Elasticity of Supply Measures
Pes > 1 Pes = 1 Elastic Supply Unit Elastic Supply
Pes < 1
Pes = 0
Price Inelastic Supply Perfectly Inelastic Supply
Price Elasticity of Supply
Price Elasticity of Supply
Used to explain why prices rise or fall dramatically when there are changes in demand.
Pes Agricultural Products
Price
P2 P1
The supply of tomatoes is fixed in short run, it is impossible to grow more by next week. If there were a sudden increase in demand, supply would be unresponsive, as supply could not change in the short run.
D1
Qty Demanded
Q1 Q2
What determines Pes?
1) Spare Production Capacity When there is spare capacity, businesses can expand output easily to meet rising demand without costs rising.
What determines Pes?
2) Stocks Available to Meet Demand A low level of stocks makes supply inelastic in the short term. When stocks can be released onto the market supply is elastic.
What determines Pes?
3) The Time Frame Short run (inelastic supply) Long run (elastic supply) 4) Artificial Limits on Supply Patents can limit the supply of a particular product
What will determine elasticity of supply of iPhones and iPads?
What will determine elasticity of supply of stadium seats at Arsenal?
What determines Pes?
Football Stadium Seats Short run capacity of any stadium is more or less fixed. Long run allows for expansion of stadium/development of ground.
What determines Pes?
Pes Football Stadium Seats
Price
P2 P1
The supply of seats was fixed in the short run when at Arsenals old stadium, the capacity was 38,000.
D1
Qty Demanded
Q1 Q2
Pes Football Stadium Seats
Price
P1
D
S1
In the long run Arsenal increased capacity to supply by moving to a 60,000 seat stadium.
D1
Qty Demanded
Q1
Q2
Differing Pes
Values for Pes
When supply is perfectly inelastic a change in price no effect on qty. When supply is perfectly elastic a firm can supply any quantity at the same market price. When supply is inelastic a change in demand affects price more than qty supplied. When supply is elastic a change in demand can be met without a change in market price.
Pes Plenary
Define Pes Give the formula to work out Pes Give two factors which determine Pes How may football tickets Pes be affected in the short run and the long run?
