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Price Elasticity of Supply (PES)

Price Elasticity of Supply (PES) measures the responsiveness of supply to changes in price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price. There are five degrees of PES ranging from perfectly inelastic to perfectly elastic supply. Factors like spare capacity, storability, economic conditions, and time period affect the elasticity of supply.

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41 views

Price Elasticity of Supply (PES)

Price Elasticity of Supply (PES) measures the responsiveness of supply to changes in price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price. There are five degrees of PES ranging from perfectly inelastic to perfectly elastic supply. Factors like spare capacity, storability, economic conditions, and time period affect the elasticity of supply.

Uploaded by

eco2day
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Price Elasticity of Supply (PES)

Define: it measures the responsiveness of supply given a change in price.

Formula: % change in QS divided by % change in price

Degrees of PES:

1. Perfectly or absolutely inelastic supply P S

Price QS

4 10 QS

5 10 PES = 0 … fixed supply of any primary sector


product that supply depends upon season…change P has no effect on QS

2. Inelastic supply P S

Price QS

4 10 QS

5 11 PES = 0. 4 inelastic supply … primary goods

… a change in price (i.e. increase in price by 1% causes a smaller % increase in


supply.. 0.4)

3. unitary elastic supply P S

Price QS

5 10 QS

6 12 PES = 1 unitary elastic supply …

… a change in price (i.e. increase in price by 1% causes a similar % increase in


supply.. 1%)… Any straight line supply curve which starts from the origin always
has unitary elastic supply
4. Elastic supply P S

Price QS

5 10 QS

6 20 PES = 5 elastic supply … Manufactured goods

… a change in price (i.e. increase in price by 1% causes a greater % increase in


supply.. 5%)

5. Perfectly or absolutely Elastic supply P S

Price QS

5 10 QS

5 20 PES = infinity elastic supply … Theory

… a change in price causes an infinite change in supply

Note: if supply is a straight line… and we extend that curve towards the axis and if
it cuts the horizontal axis then that straight line supply curve will be Inelastic
supply curve. However if it cuts the price/vertical axis then it will be Elastic supply
curve.

Upward sloping supply curve

P S
Factors affecting PES:

1. Spare capacity/excess capacity … if some FOPs are not fully utilized such as
capital or labour … supply will be elastic and vice versa

2. Whether the product can be stored … if yes then supply will be elastic (non-
perishable items or durables) and if this not the case then supply inelastic
(perishable items)

3. Level of economic activity … boom … inelastic supply and during recession…


supply elastic

4. factor substitutability… if factors can easily be switched from one job to


another or between uses without losing value then supply will be elastic.

5. Time period … SR …. Supply is inelastic … LR (greater supply of inputs and


improved machines b/c technical advancement … supply is elastic

Other: number of firms in the market and availability of resources

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