Price elasticity of supply
Price elasticity of supply = A measure of the responsiveness of a change in price compared to a change in supply.
This is determined by 2 factors:
- Availability of producer substitutes
Availability of producer substitutes
Car manufacturers face a price elastic supply because they can switch resources between the different cars they produce.
If demand is rising for one vehicle they can switch resources from aother vehicle to respond to the higher demand.
Conversely, oil producers face a price inelastic supply, because there are no acceptable substitutes. Producers can't supply more in response to rising demand, and so raise prices as a consequence.
An example is in farming. If the demand for potatoes grows (ha), then this demand can't be met as it takes time to grow potatoes. The supply is fixed and can't be easily varied. If more potatoes are to be grown, the farmer (supplier) must wait until the next season to grow more.
Calculating Price Elasticity of Supply
The formula is: % change in q.s / % change in price
The relationship between quantity supplied and price is positive, so Pes should be the same.
A Pes of 2 (positive) meanssupply is price elastic, meaning a proportionate change inprice will cause a greater than proportionate change in supply.
A Pes of -2 (negative) means supply is price inelastic, meaning the opposite of above.
The Interrelationship between Markets
There are 3 categories that come under this. These are:
- Derived demand
- Composite demand
- Joint supply
This is where goods are needed only for the production of other goods. All raw materialshave a derived demand because their demand is derived from the demand of the final good.
This is where a particular good is demanded for 2 or more uses. Land is demanded for both house building and office building. Another example is steel, which is used for construction and manufacturing.
A rise in the demand for one composite good would lead to a fall in the supply of the other good, hence a rise in price of that good.
This is where a good is supplied for 2 or more uses, so an increase or decrease in supply the supply of one good leads to an increase or decrease in the supply of another good.
E.g. a cow can supply milk, beef or leather.
An increase in the supply of beef will lead to an increase in the supply of leather. This rise will lead to a fall in the price of both goods.