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Price Elasticity of Supply

  • Price Elasticity of Supply: Price Elasticity of Supply - Welker's Wikinomics Page
  • The degree of price elasticity of supply depends on how easily - and therefore quickly - producers can shift resources between alternative uses. Unlike PED, there is no Total Revenue Test for Price Elasticity of Supply.
    • Because there is a direct relationship between Price & Total revenue, they always move together.

DETERMINANT OF PRICE ELASTICITY OF SUPPLY: TIME!

THREE PERIODS: Market period--> short run --> long run

  • Price Elasticity of Supply: the Market Period: The period that occurs when the time immediately after a change in market price is too short for producers to respond with a change in quantity supplied.
    • Suppliers cannot be picky with the price they sell their goods for
    • Some goods do not even have a market period (time is too short for any response)
    • It has a Vertical Supply Curve (meaning it is inelastic)

  • Price Elasticity of Supply: the Short Run (fixed-plant period): supply is more elastic, but not terribly so, as the time period is short
    • The period of time is not enough to change the output significantly; producers have less time to react to the change
    • ex. if gasoline prices rise, in the short run, producers are stuck with their current less fuel efficient machines and still need to produce the same output. When given time to adjust, producers can introduce fuel efficient machines, and production cost will drop and yield more quantity supplied. Thus PES becomes more elastic
    • plants intensify production and output by working longer hours, having workers work overtime, and using all available resources to the max
    • It has a steeper slope than that of the supply curve in the long run

  • Price Elasticity of Supply: the Long Run (variable-plant period): supply becomes more elastic over a longer period of time.
    • Why? because over time, new technology will adapt to the change in price to create more efficiency, and more time is allowed to allocate resources to a different field or allocate more resources to the same field
    • TIME is the major determinant of the price elasticity of supply!!! Noticeably More Horizontal Slope
    • ex. in the long-run, firms have time to change their size and adjust their production plants to suit whatever new product they want to produce.Price Elasticity of Supply - Welker's Wikinomics Page
    <--Graph: as the time increases, supply becomes more elastic; the slope decreases (becomes less slanted), thus a small change in price yields a huge change in quantity supplied
    Price Elasticity of Supply - Welker's Wikinomics Page

Applications of Price Elasticity of Supply:
  • Antiques and Reproduction
    • antiques are impossible to reproduce because these product have high inelastic supply.
    • price of the product is only slightly affected by the changes of supply and demand. Even though some other products are found, they are minimally affected.
  • Volatile Gold Prices
    • Price of gold is volatile, sometimes shooting upwards one moment and dramatically decreasing the next. This happens because of shifts in demand and highly inelastic supply. Gold production is expensive and time consuming to process.





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