Price Elasticity of Supply (PES) is a measure of the responsiveness of the quantity supplied of a good or service to a change in its price. It quantifies the degree to which the supply of a product changes in relation to a change in its market price. PES is an important concept in understanding how producers and suppliers react to changes in the market environment.
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PES measures the percentage change in quantity supplied divided by the percentage change in price.
A PES value greater than 1 indicates an elastic supply, meaning producers are highly responsive to price changes.
A PES value less than 1 indicates an inelastic supply, meaning producers are less responsive to price changes.
Factors that affect PES include the availability of resources, production technology, time, and the number of suppliers in the market.
PES is an important concept in understanding how producers and suppliers react to changes in the market environment, such as shifts in demand or changes in government policies.
Review Questions
Explain how PES is calculated and what the resulting value indicates about the responsiveness of supply.
PES is calculated as the percentage change in quantity supplied divided by the percentage change in price. A PES value greater than 1 indicates an elastic supply, meaning producers are highly responsive to price changes and will significantly adjust the quantity they are willing to sell in response to a price change. Conversely, a PES value less than 1 indicates an inelastic supply, meaning producers are less responsive to price changes and will only make small adjustments to the quantity supplied when prices change.
Describe the factors that can influence the price elasticity of supply for a good or service.
The price elasticity of supply (PES) can be influenced by several factors, including the availability of resources, production technology, time, and the number of suppliers in the market. If producers have access to abundant resources and advanced production technology, they may be able to quickly adjust the quantity supplied in response to price changes, resulting in a more elastic supply. Additionally, the longer the time period considered, the more elastic the supply is likely to be, as producers have more time to adjust their production levels. Finally, the number of suppliers in the market can also affect PES, as a more competitive market with many suppliers tends to have a more elastic supply compared to a market with few suppliers.
Analyze how changes in PES can impact the effects of government policies or other market interventions on the supply of a good or service.
The price elasticity of supply (PES) can significantly influence the impact of government policies or other market interventions on the supply of a good or service. If the supply is highly elastic (PES > 1), meaning producers are very responsive to price changes, then government policies that affect prices, such as taxes or subsidies, will have a larger impact on the quantity supplied. Producers will be more likely to adjust their production levels in response to these price changes. Conversely, if the supply is inelastic (PES < 1), meaning producers are less responsive to price changes, then the same government policies will have a smaller impact on the quantity supplied, as producers will be less inclined to change their production levels. Understanding the PES is crucial for policymakers to predict and evaluate the effectiveness of their interventions in the market.
A graphical representation of the relationship between the price of a good or service and the quantity supplied, with price on the vertical axis and quantity on the horizontal axis.
A measure of the responsiveness of one economic variable to changes in another, calculated as the percentage change in one variable divided by the percentage change in the other.