Elasticity of Supply
Economics: IB Diploma, topic 1.2.3
Price Elasticity of Supply
The price elasticity of supply measures how the quantity of supply reacts to a change in price.
Price elasticity of supply
- PES = % change in quantity supplied ÷ % change in price.
- So an elasticity of supply greater than one means that the percentage change in quantity supplied will be greater than a one % price change.
Elastic, inelastic, unit elastic
- Elastic supply, PES > 1.
- So a higher PES value means more elastic supply.
- Inelastic supply, 1 > PES > 0
- So a smaller PES value means more inelastic supply.
- Unit elasticity of supply, PES = 1.
- Percentage change in quantity supplied = percentage change in price.
High elasticity of supply is usually good
- Firms aim for high elasticity of supply so that they can react rapidly to changes in price and demand.
- To increase elasticity, firms can:
- Improve their technology.
- Introduce flexible working patterns.
- Have excess production capacity.
Factors Affecting the Price Elasticity of Supply
There are a number of factors that influence the price elasticity of supply.
Agility
- Firms that are agile keep high levels of stock.
- This makes supply price elastic as they can quickly respond to increases in demand by releasing more stock.
- More generally, firms with agile factor mobility will be more price elastic in supply.
Recessionary period
- During periods of high unemployment, we tend to see a more elastic supply.
- This is because if a firm tried to expand their production, they would have a larger pool of labour to hire.
- Their ability to attract this labour is also high.
Perishable goods
- Products that are likely to perish because of weather conditions will have a more inelastic supply.
- E.g crops and agriculture.
Elasticity of Supply in the Long and Short Run
Supply is often more elastic in the long run. Not all firms have the same concept of short and long run time periods.
Short run
- Capacity is fixed.
- One or more factors of production are fixed (usually capital).
- Often hard to increase production in this period.
- Supply = inelastic.
Long run
- No factors of production are fixed - all are variable.
- Firms are able to increase capacity.
- Supply = more elastic in the long run. Firms have more time to react to price and demand shifts.
Time periods by industry
- Capital equipment and production times differ across industries. This means that different industries have different time scales for the short run and the long run.
- E.g the long run is probably shorter for a software company like Facebook than a aeroplane manufacturer like Airbus.
Test yourself on Elasticity of Supply
Which of the following has a price elasticity of supply value greater than one?
What are firms with agile factor mobility said to be?