Price Elasticity of Supply (PS)

Introduction

• PS measures the responsiveness of quantity supplied to changes in price.
• Equation: Similar to Price Elasticity of Demand (PD), but focuses on supply:
  • PS = (% change in quantity supplied) / (% change in price)
• Remember: "Cube before you P" - Calculate quantity change before price change.

Calculating Percentage Change

• Formula: (Difference between two numbers / Original number) × 100

Law of Supply

• PS will always result in a positive number due to the law of supply:
  • Price increase leads to quantity supplied increase (both positive).
  • Price decrease leads to quantity supplied decrease (both negative).
• Positive sign is irrelevant; focus on the magnitude.

Interpretation of Elasticity

• PS > 1: Supply is price elastic (quantity supplied changes more than price).
• PS < 1: Supply is price inelastic (quantity supplied changes less than price).
• PS = 0: Perfectly price inelastic (quantity supplied does not change).
• PS = ∞: Perfectly price elastic (quantity supplied changes infinitely).
• PS = 1: Unit price elastic.

Example Calculation

• Example: Oil price increases from £40 to £60.
  • Price change: (20/40) × 100 = 50%
  • Quantity change: (30/150) × 100 = 20%
  • PS = 0.4 (price inelastic)
  • Interpretation: Quantity supplied increases less than price.

Supply Curves

• Price Inelastic Supply: Steep curve (small change in quantity supplied).
• Price Elastic Supply: Shallow curve (large change in quantity supplied).
• Perfectly Inelastic: Vertical line.
• Perfectly Elastic: Horizontal line.

Determinants of Price Elasticity of Supply

• Production Lag: Longer lag = more inelastic.
• Stock Levels: Higher stocks = more elastic.
• Spare Capacity: More capacity = more elastic.
• Substitutability of Factors: More substitutable = more elastic.
• Time Period: Short-run = inelastic; long-run = elastic.

Remembering Determinants

• Memory aid: Sound of opening a can of Coke/Pepsi (3 S's).
  • P: Production Lag
  • S: Stocks
  • S: Spare Capacity
  • S: Substitutability of Factors
  • T: Time Period

Conclusion

• Understanding PS involves grasping both the concept and calculation.
• It is crucial to use appropriate terminology and interpretations when discussing PS.