Price elasticity of supply. This article will explain what price elasticity of supply is and will explain the different types of price elastic supply.
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PRICE ELASTICITY OF SUPPLY
Price elasticity of supply (PES) is the responsiveness of the supply of a good due to a change in its price. If you wish to calculate the price elasticity of supply of a good the formula is as follows:
Percentage change in supply of a good ÷ percentage change in price of a good.
In the majority of cases, the price elasticity of supply is positive. This shows that the diagram will have a positive gradient because as price increases so does supply.
Understanding the price elasticity of supply of a a product is important to firms as it allows firms to understand how to adapt the price of their products
TYPES OF PRICE ELASTICITY OF SUPPLY
PRICE ELASTIC SUPPLY
If the price elasticity of supply is above 1, the supply is said to be price elastic. This means that there is a greater change in the supply of a good than the change in the price of the good.
For example, if there is a 20% increase in the price of a cigarette packet, this may lead to a 40% increase in supply of the cigarette packet. This would mean PES is 2
Below is the supply curve of a price elastic good:
As shown above, the supply curve of a price elastic good has a positive gradient (upward sloping) and is very flat.
PRICE INELASTIC SUPPLY
If the price elasticity of supply is less than 1, the supply is said to be price elastic. This means there is a greater change in the price of the good than the change in supply of the good.
For example, if there is a 10% increase in the price of a Rolls Royce car, this may lead to a 5% increase in the supply of the Rolls Royce car. This would mean the PES is 0.5
Below is the supply curve of a price inelastic good:
As shown above, the supply curve for a price inelastic good has a very steep, positive gradient.
UNIT ELASTIC SUPPLY
If the price elasticity of supply is equal to 1, the good is said to have unitary elastic supply. This means the percentage change in the price of a good is equal to the percentage change in supply of the good.
For example, if there is a 5% increase in the price of a cup of coffee, this may lead to a 5% increase in the supply of the coffee. This would mean the PES is 1.
Below is the supply curve of a unitary elastic good.
As shown above, the supply curve has a positive gradient equal to 1.
PERFECT PRICE ELASTIC SUPPLY
If the price elasticity of supply is infinite, the good is said to have perfect price elastic supply. This means that no matter how large of a change in supply there is, the price will always remain the same.
The supply curve of a perfectly elastic good is shown below.
As shown above, the supply curve for a perfectly elastic good is completely horizontal. This means it has no gradient.
PERFECT PRICE INELASTIC SUPPLY
If the price elasticity of supply is equal to 0, the good is said to have perfect price inelastic supply. This means that no matter how large of a change there is in the price of a good, the supply remains the same.
The supply curve of a perfectly inelastic good is shown below.
As shown above, the supply curve for a perfectly inelastic good is vertical and has a gradient of infinity.
OVERVIEW:
If PES > 1 good is price elastic
If PES < 1 good is price inelastic
If PES = 1 good has unit elasticity
If PES = 0 good is perfectly inelastic
If PES = ∞ good is perfectly elastic
In conclusion, it is crucial that companies understand the PES value for the good they sell because it affects their total revenue.
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