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
- Time
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.
Time
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.
Example
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.
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