1.2.4 Price elasticity of supply What is the relationship between price and supply? State 2 factors that would shift a supply curve to the left. What is meant by price elasticity of demand? AS: P RICE DETERMINATION IN A COMPETITIVE MARKET Y1: Price determination in a competitive market

1.2.4 P RICE ELASTICITY OF SUPPLY  Be able to calculate price elasticity of supply  The factors that influence price elasticity of supply  You should be able to interpret numerical values of price elasticity of supply

P RICE ELASTICITY OF S UPPLY PED coefficientTitleRelevance to business 0Perfectly inelasticThe business does not change S in response to a change in P. It is fixed. 0<1Price inelasticIf P rises, S will increase, BUT at a lesser proportion to the increase in price. 1Unitary (constant) elasticity Increasing or decreasing price will lead to a proportional change in supply. 1>∞ (infinity)Price elasticIf P rises, S will increase, BUT at a greater proportion to the increase in price. ∞Perfectly elasticProducers will supply any amount above a certain P. If a product is price inelastic i.e. less than 1: i)an increase in P will lead to an increase in S less than the increase in P ii)A decrease in P will lead to a decrease in S less than the decrease in P If a product is price elastic i.e. greater than 1: i)an increase in P will lead to an increase in S greater than the increase in P ii)A decrease in P will lead to a decrease in S greater than the decrease in P

P RICE ELASTICITY OF SUPPLY Example: A firm supplies 100 units at a price of £10.00 per unit. The market price increases to £15.00 so the firm supplies 10 more units. Work out the price elasticity of supply. Step 1: Step 2: Step 3: Complete the equations a-c to prove that PES is the same using all three formulas.

Q UICK TEST To calculate the percentage change in the quantity supplied of a good following a change in price, the price elasticity of supply should be a) Multiplied by the percentage change in price b) Multiplied by the percentage change in quantity c) Divided by the percentage change in price d) Divided by the percentage change in quantity Can you explain your answer?

P RICE ELASTICITY OF SUPPLY – RELEVANCE TO BUSINESS Price Quantity S A perfectly inelastic supply curve will have a PES coefficient of 0. If price was to change the quantity supplied would not be affected. In theory, the firm would supply the same amount at any given price. Price Quantity S A price inelastic supply curve will have a PES coefficient between 0 and 1. If price was to change the quantity supplied would change by a lesser amount. This may be because of difficulties in increasing supply or that the incentive to increase supply is not great enough for some firms. Perfectly inelastic Price inelastic Unlike PED, the PES coefficient is likely to have a positive figure. As price increases firms find it more profitable to increase supply.

P RICE ELASTICITY OF SUPPLY – RELEVANCE TO BUSINESS Price Quantity S A perfectly elastic product will have a PES coefficient of ∞. If price was to stay the same or increase the quantity supplied would be infinite. If price was to decrease the quantity supplied would fall to zero. Price Quantity S A price elastic product will have a PES coefficient between 1 and ∞. If price was to change the quantity supplied would change by a greater amount. Firms find it easy to increase supply or the incentive to increase supply has become greater. Price elastic Perfectly elastic

D ETERMINANTS OF PRICE ELASTICITY OF SUPPLY  Price elasticity of supply is determined by:  Price Increases in price act as an incentive for firms to increase supply At higher price levels a firm is more profitable as the contribution per unit (selling price – variable cost) is higher  Substitutes The number and closeness of producer substitutes will help to determine PES If it is easy for a firm to change production of its products e.g. from tables to chairs then PES is likely to be very price elastic and vice versa The easier it is to switch production the higher the PES  Time In the short run products are likely to be more price inelastic as producers find it difficult to increase production In the long run products are likely to be more price elastic as producers adjust to changing market conditions by buying more machinery, building new factories etc. Therefore, it is easier to increase capacity Firms will try to increase their PES. A more elastic PES coefficient suggests that the firm is more flexible in changing the supply of its products, thereby making it more competitive. This contrasts to PED where firms will wish to have a more inelastic PED coefficient. Agricultural markets are often used to illustrate price elasticity of supply. What trends are driving the PES of food in global markets?

T EST YOURSELF The following table shows estimated annual changes in the price and supply of organic tomatoes: Define the term price elasticity of supply. Always make use of relevant calculations when doing elasticity questions. Year% change in price% change in quantity supplied Using the information in the table comment on the business relevance for organic tomato growers of the changes in PES between 2013 and 2015.

E LASTICITIES  Price elasticity of demand  PED coefficient  Price elastic demand  Price inelastic demand  Perfectly price elastic demand  Perfectly price inelastic demand  Income elasticity of demand  YED coefficient  Income elastic demand  Income inelastic demand  Inferior goods  Giffen goods  Cross elasticity of demand  XED coefficient  Substitutes  Complementary goods  Price elasticity of supply  PES coefficient  Price elastic supply  Price inelastic supply  Perfectly price elastic supply  Perfectly price inelastic supply Take it in turns to pick a term and explain it to the rest of the group. After each explanation one member of the group should ask a question to clarify any points made or to stretch to add an additional point e.g. what would that look like in a diagram?