07/10/15
Lesson 5: Price elasticity of supply (PES)
Learning Objective-I can list and explain the three different determinants of PES.
DA-
PES is a measure of how much the supply of a product changes when there is a change in the price of the product.
DA-
PES is a measure of how much the supply of a product changes when there is a change in the price of the product.
Range values of PES: Perfectly inelastic/elastic Perfectly Inelastic: PES = 0
In the short run or immediate time period, it is impossible for firms to increase their supply straight away, no matter what happens to price. Nothing changes until new factors of production could be employed. Perfectly Elastic: PES = Infinite
Unitary Elastic: PES = 1
Price Elastic: PES > 1
Price Inelastic: PES < 1
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Determinants of PES:
1. How much costs rise as output is increased-If total costs rise significantly as a producer attempts to increase supply then it is likely that the producer will not raise the supply=relatively inelastic. Large price rises necessary to make increased supply justified. If total costs do not rise significantly then the producer will raise the quantity supplied and take advantage of low increase in total costs.
- Existence of unused capacity-Increase output without great cost increase=elastic
- Mobility of factors of production-If factors of production are easily moved from one productive use to another then PES will be relatively elastic.
3. Ability to store stock-If a firm is able to store high levels of stock of their product, then they'll be able to react to price increases=elastic.
Activity: SWP 4.7
A firm producing stuffed toys experiences an increase in the demand for its main product, a cuddly dog, because an increase in its popularity. The price of the toy rises from $15-$18. In response, the firm increases its output of the toy from 5,000 per week to 5,500 per week.
1. Using a demand and supply diagram, explain why the price of the toy dog has increased.
2. Calculate the elasticity of supply for the toy dog.
PES for commodities:
Commodities tend to have inelastic supply as a change in price cannot lead to a proportionally large increase in quantity supplied.
- Ex, If there were to be an increase in cocoa, producers would be unable to respond with a proportionate increase in the quantity as it takes time to grow the cocoa and/or it takes time to re-allocate resources to the production of cocoa. Decrease in price also presents a problem because the crop might already be harvested.
Manufactured goods tend to be more elastic as it is easier to increase or decrease quantity supplied in response to change in price.
Activity:
Calculate the PES for foot massage services in Singapore if the number of appointments offered per week increases from 2,140-2,568 when the market price increases from S$50-55 per appointment. Identify the determinant of PES which is applicable.