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2.7 Price elasticity of supply

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Presentation on theme: "2.7 Price elasticity of supply"— Presentation transcript:

1 2.7 Price elasticity of supply
1. Understand price elasticity of supply. 2. Understand implications of price elasticity of supply

2 PES measures the responsiveness of QS to a change in price.
PES = % CHANGE IN QS/ % CHANGE IN PRICE

3 Perfectly Inelastic Supply =0

4 Perfectly Elastic Supply

5 Factors which influence PES
SPARE CAPACITY – If factory only working 4 days a week, supply can be increased by working the 5th day. Therefore responsive to change. LEVEL OF STOCKS – Low stock levels mean a company can not respond quickly to change. PRODUCTION LAGS – Christmas trees, take 25 years to grow – perfectly inelastic.

6 SUBSTITUTABLITY OF FACTORS OF PRODUCTION – If a firm is able to realign its business so it can move between production lines, supply is elastic. (Health clubs – cars production / phone company to computers) TIME PERIOD – The shorter the time period the more inelastic supply will be.

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