Price Elasticity of Supply (PS)

Introduction

• PS measures the responsiveness of quantity supplied due to a change in price.
• Similar to price elasticity of demand (PD) but for supply.
• Understanding PS requires familiarity with PD concepts.

Equation

• PS Formula: Percentage change in quantity supplied / Percentage change in price.
• Key Reminder: Q before P (quantity before price).
• Convert changes to percentages using:
  • (Difference between two numbers / Original number) x 100.

Characteristics of PS

• Computation always yields a positive number due to the law of supply:
  • Price increase -> quantity supplied increases.
  • Price decrease -> quantity supplied decreases.
• Positive sign can be ignored when interpreting elasticity.

Interpreting Elasticity

• Greater than 1: Supply is price elastic - quantity supplied changes more than price.
• Less than 1: Supply is price inelastic - quantity supplied changes less than price.
• Zero: Perfectly price inelastic - quantity supplied does not change regardless of price.
• Infinity: Perfectly price elastic.
• Unit Elastic: Supply changes proportionately with price.

Example Calculation

• Price Change Calculation: From £40 to £60
  • ((60-40)/40) x 100 = 50% increase.
• Quantity Supplied Change: From 150 to 180 barrels.
  • ((180-150)/150) x 100 = 20% increase.
• PS Calculation: 0.4 (Price Inelastic Supply).
• Interpretation: As oil price increases, quantity supplied increases but less proportionately.

Supply Curves

• Price Inelastic Supply: Steep curve - quantity supplied changes less than price.
• Price Elastic Supply: Shallow curve - quantity supplied changes more than price.
• Perfectly Price Inelastic Supply: Vertical curve.
• Perfectly Price Elastic Supply: Horizontal curve.

Determinants of Price Elasticity of Supply

• Production Lag: Longer lag makes supply more inelastic.
• Level of Stocks: Larger stocks make supply more elastic.
• Spare Capacity: More spare capacity increases elasticity.
• Substitutability of Factors: More substitutable factors increase elasticity.
• Time Period:
  • Short-run: Supply is price inelastic (fixed factors).
  • Long-run: Supply is price elastic (variable factors).

Summary

Understanding PS involves recognizing how various factors affect the ability of suppliers to respond to price changes, similar to how PD operates but focused on supply dynamics.

Thank you for watching. See you in the next elasticity video on XEV.