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Lecture Notes PES

Price Elasticity of Supply (PES) measures how quantity supplied responds to price changes, with values indicating elastic, inelastic, or unitary elasticity. Factors affecting PES include time period, inventory levels, spare capacity, and production speed, influencing how quickly producers can adjust supply. Understanding PES is crucial for producers, consumers, and governments, as it impacts pricing, profit opportunities, and taxation strategies.

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3 views2 pages

Lecture Notes PES

Price Elasticity of Supply (PES) measures how quantity supplied responds to price changes, with values indicating elastic, inelastic, or unitary elasticity. Factors affecting PES include time period, inventory levels, spare capacity, and production speed, influencing how quickly producers can adjust supply. Understanding PES is crucial for producers, consumers, and governments, as it impacts pricing, profit opportunities, and taxation strategies.

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mishibhandari1923
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We take content rights seriously. If you suspect this is your content, claim it here.
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Lecture Notes on Chapter 11– Price Elasticity of Supply (PES)

1. Definition
Price Elasticity of Supply (PES): Measures the responsiveness of quantity supplied to a change in price.

2. Values of PES
• Elastic supply (PES > 1): % change in Qs > % change in Price.
• Inelastic supply (PES < 1): % change in Qs < % change in Price.
• Unitary elasticity (PES = 1): % change in Qs = % change in Price.
• Perfectly elastic (PES = ∞): Any price fall → supply falls to zero.
• Perfectly inelastic (PES = 0): Supply does not change with price.
3. Determinants of PES (Factors affecting supply elasticity)
1. Time period – Short run: supply inelastic; Long run: more elastic.
2. Stocks (inventories) – Large stocks make supply elastic; no stocks → inelastic.
3. Spare capacity – If firms have unused resources, supply is elastic; full capacity → inelastic.
4. Availability of factors – Easy availability of raw materials/labour makes supply elastic.
5. Mobility of factors – If factors can be moved between industries, supply is elastic.
6. Production speed – Quick-to-produce goods (bread, clothes) have elastic supply; slow-to-produce goods
(ships, buildings) have inelastic supply.
7. Perishability – Perishable goods (fruits, vegetables) → inelastic; durable goods → elastic.
4. Importance / Implications of PES
• For producers:
o If supply is elastic, firms can respond quickly to price rises → higher profits.
o If supply is inelastic, firms cannot expand easily → may lose profit opportunities.
• For consumers:
o Inelastic supply → prices rise quickly when demand increases.
o Elastic supply → more stable prices.
• For government:
o Useful in taxation: inelastic supply → producers bear most of tax.
o Useful in subsidies: elastic supply → subsidies encourage large increases in output.

5. Diagram
• Elastic supply curve → flatter.
• Inelastic supply curve → steeper.

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