6.2 - Price Elasticity of Supply (PES)
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Introduction to PES
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Today, we will delve into Price Elasticity of Supply, or PES. PES measures how much the quantity supplied of a good responds to price changes. Can anyone tell me why this is important?
I think it's important because it helps producers understand how to react to price changes.
Exactly! If producers know how responsive their supply is to price changes, they can adjust their production accordingly. What do you think would happen if PES is high?
That means if prices go up, they will increase their production a lot!
Correct! That would be an example of elastic supply. Let's remember: when we think of elastic, think 'eager to respond'. What about inelastic?
That would mean they wouldn't increase production much with a price change, right?
Yes! Inelastic supply means suppliers are less responsive. Great job, everyone!
Let's summarize: PES tells us how quantity supplied reacts to price changes, with elastic being more responsive. Remember: Eager for elasticity!
Calculating PES
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Now, let's look at how to calculate PES. The formula is the percentage change in quantity supplied divided by the percentage change in price. Can anyone provide an example?
What if the price of oranges goes from $1 to $1.50, and the quantity supplied increases from 100 to 150 oranges?
Great example! First, calculate the percentage change in price and quantity. What do you find?
The price change is 50% and the quantity change is also 50%!
Right! So PES would be 50% divided by 50%, which is 1. This means the supply is unitary elastic! What does that signify?
It means that the changes in supply are equal to the changes in price!
Exactly! Unitary elasticity means a proportional response. Let’s summarize: PES is calculated as the percent change in quantity supplied over the percent change in price.
Factors Affecting PES
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Now, let's turn to factors influencing PES. Some crucial factors include production time, availability of resources, and mobility of factors. Can anyone explain why these matter?
If production takes a long time, like for computer chips, then supply might not change quickly!
Spot on! Longer production times lead to inelastic supply because it's harder to adjust quickly. What about resource availability?
If a resource is scarce, like specialized labor, it’s harder for producers to increase supply!
Exactly! Limited resources lead to inelasticity. Remember this: for elasticity, consider 'time and resources'.
Introduction & Overview
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Quick Overview
Standard
PES is defined as the percentage change in quantity supplied divided by the percentage change in price. If the PES is greater than one, supply is elastic; if it's less than one, supply is inelastic, reflecting how producers adjust their output based on price changes.
Detailed
Price Elasticity of Supply (PES)
Price Elasticity of Supply (PES) is a critical concept in microeconomics that quantifies how sensitive the quantity supplied of a good is to a change in its price. It is calculated using the formula:
$$ PES = \frac{% \text{ change in quantity supplied}}{% \text{ change in price}} $$
The elasticity can either be elastic, inelastic, or unitary:
- Elastic Supply: When PES > 1, a change in price leads to a proportionately larger change in quantity supplied.
- Inelastic Supply: When PES < 1, quantity supplied changes less than the price change.
- Unitary Elastic Supply: When PES = 1, the percentage change in quantity supplied equals the percentage change in price.
Understanding PES helps economists and businesses predict how changes in market prices affect production strategies, impacting inventory management and pricing decisions.
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Definition of Price Elasticity of Supply
Chapter 1 of 4
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Chapter Content
Price Elasticity of Supply (PES) measures how much the quantity supplied changes with a change in price.
Detailed Explanation
Price Elasticity of Supply (PES) is an important concept in microeconomics that quantifies the responsiveness of the quantity supplied of a product to changes in its price. It tells us how much more or less of a good producers are willing to sell when the price goes up or down. Essentially, if a small change in price leads to a large change in the quantity supplied, then we say supply is elastic. Conversely, if a change in price results in a small change in the quantity supplied, it's called inelastic.
Examples & Analogies
Think of a small bakery that makes cupcakes. If the price of cupcakes increases from $2 to $3, the bakery might be able to make and sell a lot more cupcakes quickly because they can buy more ingredients and hire more staff. This shows elastic supply. In contrast, if a farmer grows apples and the price changes, but it takes longer to grow more apples due to the growing season, the supply is less responsive, demonstrating inelasticity.
Understanding Elastic and Inelastic Supply
Chapter 2 of 4
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Chapter Content
The terms elastic and inelastic describe how responsive the supply of a good is to changes in price.
Detailed Explanation
Elastic supply occurs when a small increase in price results in a large increase in quantity supplied. This often happens in industries where producers can easily adjust their output. For example, a clothing company can quickly increase production to meet higher demand. On the other hand, inelastic supply is when changes in price do not significantly affect the quantity supplied. This is common in industries that require long production times or are constrained by factors such as natural growth or production capacity, like farming or oil extraction.
Examples & Analogies
Consider a concert venue. If ticket prices for a concert increase, the venue manager can sell more tickets (elastic), as they have the capacity to accommodate more guests quickly. However, if ticket prices drop, they can't increase the number of seats available (inelastic) since they are fixed by the building's design.
Factors Affecting PES
Chapter 3 of 4
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Chapter Content
Several factors influence the price elasticity of supply, including production time, availability of resources, and mobility of factors of production.
Detailed Explanation
The price elasticity of supply can be influenced by various factors. The time period considered is crucial; in the short term, producers may not be able to increase supply quickly due to existing constraints. For example, a factory with machinery running at full capacity may find it hard to increase production immediately. In the long term, however, companies can invest in new technology or resources, making supply more elastic. The availability of raw materials also plays a role; if materials are abundant, producers can easily increase production. Additionally, if the factors of production (like labor and capital) can be easily moved or adjusted, the supply response will be more elastic.
Examples & Analogies
Imagine a shoe manufacturer. If demand for a certain type of shoe suddenly spikes, the company can’t quickly increase production due to the time required to gather materials or hire additional workers in the short run (inelastic). However, over a few months, they can set up new production lines or source more materials, making their supply elastic.
Calculating PES
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Chapter Content
Price elasticity of supply is calculated using the formula: PES = % Change in Quantity Supplied / % Change in Price.
Detailed Explanation
PES is quantified using a simple formula: to find PES, you divide the percentage change in quantity supplied by the percentage change in price. This gives a numerical value that indicates how responsive the supply is to a price change. If the PES is greater than 1, supply is considered elastic; if it is less than 1, it is inelastic, and if it equals 1, supply is unitary elastic.
Examples & Analogies
For example, if a farmer usually supplies 100kg of tomatoes and the price increases from $2 to $3 (a 50% price increase), and as a result, the farmer supplies 150kg (a 50% increase in quantity), we can calculate PES: PES = (50% increase in quantity) / (50% increase in price) = 1. Here, the supply is unit elastic. If the price increase caused the quantity supplied to double instead (to 200kg), PES would be 2, signaling an elastic response.
Key Concepts
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Price Elasticity of Supply (PES): The responsiveness of quantity supplied to price changes.
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Elastic Supply: Supply that significantly reacts to price changes.
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Inelastic Supply: Supply that does not react significantly to price changes.
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Unitary Elastic Supply: Supply that responds proportionately to price changes.
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Factors Affecting PES: Elements that determine how elastic or inelastic supply will be.
Examples & Applications
If the price of a smartphone increases by 20% and the quantity supplied increases by 40%, the PES is 2 (elastic).
If the price of wheat rises by 10% but the quantity supplied only rises by 5%, the PES is 0.5 (inelastic).
Memory Aids
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Rhymes
With price changes in a hurry, elastic supplies won't worry!
Stories
Imagine a baker who can quickly prepare more loaves when prices rise. But a farmer, who needs time to grow crops, can't respond as fast—showing elastic vs. inelastic supply.
Memory Tools
Remember: Eager for Elastic, Lazy for Inelastic.
Acronyms
PES - Promptly Elastic Supply for rapid changes.
Flash Cards
Glossary
- Price Elasticity of Supply (PES)
A measure of how much the quantity supplied of a good changes in response to a change in its price.
- Elastic Supply
A situation where the quantity supplied changes significantly in response to a change in price (PES > 1).
- Inelastic Supply
A situation where the quantity supplied changes little in response to a change in price (PES < 1).
- Unitary Elastic Supply
A situation where the percentage change in quantity supplied is equal to the percentage change in price (PES = 1).
- Production Time
The time it takes to produce a good, which affects the responsiveness of supply to price changes.
- Resource Availability
The accessibility and extent of resources needed for production, influencing the elasticity of supply.
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