Identify three factors that determine the price Elasticity of Supply(PES) of a good.
A good has a high price elasticity of supply if the quantity supplied changes a great deal when the price of the good changes. There are some factors which affect the PES:
- The availability of substitutes. If sellers of the good can easily switch between various goods, the elasticity of supply will be high. If the price of Good A drops, the suppliers of that good can and will switch to producing Good B.
- How long of a time period you are analyzing. The longer a time period, the more elastic the supply. This is because suppliers can change to producing a good if they are given a long enough period of time in which to do so.
I know that you asked for three, but the books that I have assigned in classes I have taught only mention 2.
- Price Elasticity of Supply = (% Change in Quantity Supplied)/
(% Change in Price)
The price elasticity of supply is used to see how sensitive the supply of a good is to a price change. The higher the price elasticity, the more sensitive producers and sellers are to price changes. Price Elasticity of Supply (PES) measures the responsiveness of supply to a change in price. Factors which influence PES are spare capacity, availability of stock, the time period involved and the mobility of factors. The main factors that influence Price Elasticity of Supply are:
- The availability of substitutes: If sellers of the good can easily switch between various goods, the elasticity of supply will be high. If the price of one good drops, the suppliers of that good can and will switch to producing the other good (substitute.)
- Length of time analyzed: The longer a time period, the more elastic the supply. This is because suppliers can change to producing a good if they are given a long enough period of time in which to do so.
- Availability of raw materials: for example, availability may cap the amount of gold that can be produced in a country regardless of price.
- Length and complexity of production: Much depends on the complexity of the production process. Textile production is relatively simple. The labor is largely unskilled and production facilities are little more than buildings – no special structures are needed. Therefore the PES for textiles is elastic. On the other hand, the PES for specific types of motor vehicles is relatively inelastic. Auto manufacture is a multi-stage process that requires specialized equipment, skilled labor, a large suppliers network and large R&D costs. Therefore the more complex and difficult the product the less elastic the PES.
- Mobility of factors: If the factors of production are easily available and if a producer producing one good can switch their resources and put it towards the creation of a product in demand, then it can be said that the PES is relatively elastic. The inverse would make the PES relatively inelastic.
- Excess capacity: A producer who has unused capacity can quickly respond to price changes in the market, assuming that variable factors are readily available.
- Inventories: A producer who has a supply of goods or available storage capacity can quickly increase supply to market.
Price elasticity of supply is defined as the percentage change in quantity supplied by suppliers divided by the percentage change in price.
The factors that influence the price elasticity of demand are:
- The ease and cost of increasing production. If the production capacity can be adjusted easily in response to changing prices the price elasticity of supply is likely to be high, as production can be increased with little increase in price.
- The period for which the price changes are sustained. For very short term price fluctuations the suppliers do not have enough time adjust their supplies, and the price remains inelastic. However, the price elasticity increases with the period for which price changes are sustained.
The Price Elasticity of Supply measures the rate of response of quantity demand due to a price change. If you've already read The Price Elasticity of Demand and understand it, you may want to just skim this section, as the calculations are similar. (Your course may use the more complicated Arc Price Elasticity of Supply formula. If so you'll need to see the article on Arc Elasticity) We calculate the Price Elasticity of Supply by the formula:
PEoS = (% Change in Quantity Supplied)/(% Change in Price)