Price Elasticity of Supply - Essay

Price Elasticity of Supply |
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In this chapter we consider elasticity of supply. Students should understand how to calculate elasticity of supply and understand some of the factors that influence the elasticity of supply for different products.Definition of price elasticity of supplyPrice elasticity of supply measures the relationship between change in quantity supplied and a change in price.
If supply is elastic, producers can increase output without a rise in cost or a time delay
If supply is inelastic, firms find it hard to change production in a given time period.The formula for price elasticity of supply is:Percentage change in quantity supplied divided by the percentage change in price   * When Pes > 1, then supply is price elastic   * When Pes < 1, then supply is price inelastic   * When Pes = 0, supply is perfectly inelastic   * When Pes = infinity, supply is perfectly elastic following a change in demandFactors that Affect Price Elasticity of Supply(1) Spare production capacityIf there is plenty of spare capacity then a business should be able to increase its output without a rise in costs and therefore supply will be elastic in response to a change in demand. The supply of goods and services is often most elastic in a recession, when there is plenty of spare labour and capital resources available to step up output as the economy recovers.(2) Stocks of finished products and componentsIf stocks of raw materials and finished products are at a high level then a firm is able to respond to a change in demand quickly by supplying these stocks onto the market - supply will be elastic. Conversely when stocks are low, dwindling supplies force prices higher and unless stocks can be replenished, supply will be inelastic in response to a change in demand.(3) The ease and cost of factor substitutionIf both capital and labour resources are occupationally mobile then the elasticity of supply for a product is higher than if capital and labour cannot easily...