IGCSE Economics: Price Elasticity of Supply

IGCSE Economics: Price Elasticity of Supply What is it? ● In examining PES, we want to find out how much will quantity supplied change given a certain change in price. ● PES measures the responsiveness of the quantity supplied to a given price change. ● Remember that the PES will always be positive on account of the positive gradient displayed by the supply curve. What does a PES Value Represent? ● When a PES value is greater than one (change in quantity supplied exceeds the change in price): ○ The supply of a good is said to be price elastic. ■ A small change in price could lead to a large change in quantity supplied ■ Remember that the supply curve representing a good that is price elastic must intersect somewhere along the positive section of the y-axis if extended and does not necessarily have to have a very shallow slope but it is best to show this in exams. ● When a PES value is less than one (change in quantity supplied is less than the change in price): ○ The supply of that good is said to be price inelastic. ○ Remember that a supply curve representing a good that is price inelastic has to intersect the positive section of the x-axis if extended and does not necessarily have to be steep though it is best to show this in exams. ● Please note that all the above “changes” are really “percentage changes.” Examples: ● PES > 1. Such goods include all manufactured goods (DVD players, mobile phones, etc.) ● PES < 1. Such goods include all goods that are hand crafted as well as all goods that are rare (with physical constraint), an example of a good with a physical constraint is hand crafted furniture or diamonds. ○ Physical constraint is defined as a limited supply of factors of production such as land and labor. What Affects PES? ● Whether or not there is any spare capacity in a firm such as unused or idling machinery (Availability of resources). ● Time considerations: ○ How long does it take to make the good required. (For instance coffee beans take 3 years to mature thus making the supply of coffee beans price inelastic because it is harder for suppliers to alter the number of coffee beans that are being produced, in a short period of time.) ○ Whether or not the good can be stored. ■ The supply at any one moment is static and unchanging. (Take for example a flower stall; this stall will only have a fixed number of flowers in stock on any given day because it would require time to acquire more flowers.) ○ In the short run supply is inelastic. (Firms may be able to supply more of one good because of a price rise but it would take time for the firms to actually begin supplying much more of the said good. This is because of the limited factors of productions such as a limited number of laborers or machines.) ○ In the long run supply is elastic. (If the price of a certain good is on the rise than firms may choose to invest more on the factors of production involved in producing that good which would allow them to expand the scale of production and therefore increase supply accordingly. This of course, only happens in time.) ● Availability of production substitutes: ○ Goods that have no or few production substitutes tend to be relatively price inelastic: ■ Suppliers have less choice as to what they could produce with the factors of production that they employ. Because of this it becomes harder for suppliers to change from supplying one good to supplying another good which yields higher revenue than the former. ○ Whereas goods that have more production substitutes tend to be price elastic: ■ Suppliers have more choice as to what they can produce with the resources that they have and thus can easily choose to switch between producing one good to producing another good which yields higher revenue than the former. ● Generally, primary goods are more price inelastic than secondary goods. This is because: ○ The production processes involved in making primary goods are generally determined by nature (longer production period). ○ Many such goods cannot be stored (perishable). ● Please remember that for things that are perfectly price elastic there is no supply. ● Mining is an agricultural practice.