Price elasticity of supply

Summary

This video delves into the concept of price elasticity of supply, explaining its definition and the factors that influence it. It explores how the responsiveness of quantity supplied to price changes can vary, leading to products being classified as price elastic or inelastic. Key determinants such as production time, factor availability, and stock levels are discussed. The video also demonstrates how to calculate price elasticity of supply using a formula and illustrates the concept on a supply curve diagram, highlighting the differences between elastic, inelastic, and perfectly elastic or inelastic supplies.

Takeaways

• 📈 Price elasticity of supply measures how responsive the quantity supplied is to changes in price.
• 🔍 Factors affecting price elasticity include the time it takes to produce the product, availability and mobility of production factors, and the presence of existing stocks.
• ⏱️ The longer it takes to produce a product, the more price inelastic the supply is likely to be.
• 🌐 The mobility of production factors, such as labor, plays a significant role in determining supply elasticity.
• 📦 Products with perishable goods or limited stock tend to have more price inelastic supply.
• 💡 Price elasticity of supply can be calculated by dividing the percentage change in quantity supplied by the percentage change in price, resulting in a positive coefficient.
• 🔑 A value greater than one indicates price elastic supply, showing a high responsiveness to price changes.
• 📉 Values between zero and one signify price inelastic supply, where the quantity supplied is less responsive to price changes.
• 🔄 Unitary elasticity occurs when a percentage change in price results in an equal percentage change in quantity supplied.
• 📊 The supply curve's steepness can visually represent the elasticity of supply; a flatter curve indicates more elastic supply, while a steeper curve indicates less elastic supply.

Q & A

What is price elasticity of supply?

Price elasticity of supply measures how responsive the quantity supplied of a product is to changes in its price. It indicates whether the supply is more price elastic or more price inelastic.

What factors affect the price elasticity of supply?

The factors affecting price elasticity of supply include the time it takes to produce the product, the availability and mobility of factors of production, and the availability of product stocks.

Why is the production time significant in determining price elasticity of supply?

Production time is significant because it influences how quickly a producer can respond to price changes. Products with longer production times tend to have more inelastic supply, while those with shorter production times can adjust more quickly and thus have more elastic supply.

How does the availability and mobility of factors of production impact price elasticity of supply?

The availability and mobility of factors of production affect price elasticity because if there are many available and easily redeployable workers, the supply can adjust more quickly to price changes, making it more elastic.

What is the role of product stocks in price elasticity of supply?

Product stocks play a role in price elasticity because businesses with large available stocks can quickly increase the quantity supplied in response to price increases, making the supply more elastic.

How is price elasticity of supply represented on a supply curve diagram?

Price elasticity of supply is represented on a supply curve diagram by the steepness of the curve. A relatively elastic supply is shown by a shallow gradient, while a relatively inelastic supply is shown by a steeper gradient.

What is the formula for calculating price elasticity of supply?

The formula for calculating price elasticity of supply is: (Percentage change in quantity supplied) / (Percentage change in price). The result is always positive due to the direct relationship between price and quantity supplied.

What does a value greater than one in price elasticity of supply indicate?

A value greater than one indicates price elastic supply, meaning the quantity supplied is very responsive to changes in price, with a larger percentage change in quantity supplied relative to the percentage change in price.

What does a value between zero and one in price elasticity of supply signify?

A value between zero and one signifies price inelastic supply, where the change in quantity supplied is smaller in relation to the change in price, indicating a less responsive supply to price changes.

What are the theoretical extremes for price elasticity of supply?

The theoretical extremes for price elasticity of supply are perfectly inelastic supply, indicated by a value of zero, and perfectly elastic supply, indicated by a value of positive infinity. Perfectly inelastic supply means no change in quantity supplied regardless of price changes, while perfectly elastic supply means infinite responsiveness to price changes.

Can you provide an example of calculating price elasticity of supply?

An example given in the script is for a t-shirt manufacturer where the price increases from £8 to £10, leading to a 50% increase in quantity supplied. The price elasticity of supply is calculated as 50% / 25% = 2, indicating price elastic supply.