- Price elasticity of supply
- The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.
- Price elasticity of demand
- The price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in price.
Determinants of price elasticity of supply
Can you name the four determinants of price elasticity of supply?
Each one decides how quickly output can grow when the price rises.
Spare capacity is machinery, space and labour a firm already has but is not fully using, so output can rise without building anything new.
Can you think of an example?
The price of bread rises 10 per cent. A bakery with ovens standing idle in the afternoons bakes 25 per cent more within a week: an elasticity of 2.5, elastic.
Stocks are finished goods held in a warehouse, which a firm can release onto the market at once when the price rises, before producing anything extra.
Can you think of an example?
A toy firm with a warehouse full of last year's best seller can put far more on sale in the week its price jumps, so its supply is elastic.
Availability of inputs is how easily producers can get more of what a good is made from: readily available inputs make supply highly elastic, limited ones highly inelastic.
Can you think of an example?
Pizza, bread and books use inputs that are easy to buy more of, so output rises quickly. No price rise can create more flats facing a famous park.
The time period is how long producers have to respond; supply is more elastic over several years, when new factories can be built and workers hired, than within months.
Can you think of an example?
The price of apples rises 10 per cent. A farmer can add 2 per cent at most this season, an elasticity of 0.2, but can plant new trees that raise output in later years.