PRICE ELASTICITY OF SUPPLY
This measures the strength of relationship between price and quantity supplied, ie to what extent can quantity supplied be changed in response to a price change.
Formula for PES
PES = % change in QS / % change in Price
If the coefficient is less than one, supply is price inelastic
If the coefficient is greater than one, supply is price elastic
Influences on PES
Stock levels: the more supplies a company has in storage, the
easier it is able to increase output in response to a price increase, ie supply
becomes more elastic, the more stock in storage
Spare capacity: if a company has unused resources it can increase output more
easy than if there was no spare capacity, eg it could increase output by taking
on more workers or using machines more effectively
Time: supply usually becomes more elastic in the long run as firms are able to
switch more resources into the production of a good, eg in response to a price
increase a car firm could increase capacity by building a new factory
Length of production cycle: the longer the production cycle, the more difficult
it becomes to increase output in the short term, eg supply is more elastic for
the production of cars than the production of a bridge
Application of PES
Agricultural markets in the short run and long run