Price elasticity of supply

Price elasticity of supply

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Encyclopedia
Price elasticity of supply (PES or Es) is a measure used in economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price.

When the coefficient is less than one, the supply of that good can be described as inelastic; when the coefficient is greater than one, the supply can be described as elastic. An elasticity of zero indicates that quantity supplied does not respond to a price change: it is "fixed" in supply. Such goods often have no labor component or are not produced, limiting the short run prospects of expansion. If the coefficient is exactly one, the good is said to be unitary elastic.

The quantity of goods supplied can, in the short term, be different from the amount produced, as manufacturers will have stocks which they can build up or run down.

Determinants


Availability of raw materials: for example, availability may cap the amount of gold that can be produced in a country regardless of price. Likewise, the price of Van Gogh paintings is unlikely to affect their supply.

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. Thus 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.

Mobility of factors: If the factors are easily available and producer of other product can switch their resources to the production of this product. In this case price elasticity of supply of the product would to be price elastic.

Time to respond: The more time a producer has to respond to price changes the more elastic the supply. Supply is normally more elastic in the long run than in the short run for produced goods, since it is generally assumed that in the long run all factors of production
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...

 can be utilised to increase supply, whereas in the short run only labor can be increased, and even then, changes may be prohibitively costly. For example, a cotton farmer cannot immediately (i.e. in the short run) respond to an increase in the price of soybeans because of the time it would take to procure the necessary land.

Excess capacity: A producer who has unused capacity can (and will) quickly respond to price changes in his 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.

Various research methods are used to calculate price elasticities in real life, including analysis of historic sales data, both public and private, and use of present-day surveys of customers' preferences to build up test markets
Marketing research
Marketing research is "the function that links the consumer, customer, and public to the marketer through information — information used to identify and define marketing opportunities and problems; generate, refine, and evaluate marketing actions; monitor marketing performance; and improve...

 capable of modelling such changes. Alternatively, conjoint analysis
Conjoint analysis
Conjoint analysis, also called multi-attribute compositional models or stated preference analysis, is a statistical technique that originated in mathematical psychology. Today it is used in many of the social sciences and applied sciences including marketing, product management, and operations...

(a ranking of users' preferences which can then be statistically analysed) may be used.

cost of storage if the cost of storage of a produced commodity is high, the producer would store less and supply more thus increasing supply whereas if the cost of storage is low, the producer would store more and supply less thus decreasing supply.

Graphical representation


It is important to note that elasticity and slope are, in the most part, unrelated. Thus, when supply is represented linearly, regardless of the slope of the supply line, the coefficient of elasticity of any linear supply curve that passes through the origin is 1 (unit elastic). The coefficient of elasticity of any linear supply curve that cuts the y-axis is greater than 1 (elastic), and the coefficient of elasticity of any linear supply curve that cuts the x-axis is less than 1 (inelastic). Likewise, for any given supply curve, it is likely that PES will vary along the curve.

Selected supply elasticities

  • Heating Oil
    • 1.57 (Short Run)
  • Gasoline
    • 1.61 (Short Run)
  • Tobacco
    • 7.0 (Long Run)
  • Housing
    • 1.6–3.7 (Long Run)
  • Cotton
    • 0.3 (Short Run)
    • 1.0 (Long Run)
  • Steel
    • 1.2 (Long Run, from Minimills)