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Price Elasticity of Supply and Product Differences

Spain has had one of the highest unemployment rates in Europe. Moreover, 3.5 million of those unemployed had been out of work for at least a year by 2015. The Spanish Government has introduced a range of policy measures, including increased government spending, to reduce unemployment and poverty. It has also tried to help firms make the supply of their products more elastic.

Analyse why price elasticity of supply can differ between products. [6]

Category:

Elasticity

[CIE O level]

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Answer

When a questions starts with ‘Analyse’ , the student is required to set out the main points and show how they link and connect.


Step ➊ : Define ‘price elasticity of supply’ in the introduction.

Price elasticity of supply (PES) measures of the responsiveness of quantity supplied to a change in price.

The formula for PES is as follows :

% change in quantity supplied

% change in price.

Supply is price elastic (i.e. PES > 1) if producers can quite easily increase supply without a time delay when there is an increase in the price of the product. Supply is price inelastic (i.e. PES <1) if firms find it difficult to change production in a given time period when the market price changes.


Step ➋ : Analyse why the price elasticity of supply can differ between products. E.g production time perishability etc...


The price elasticity of supply can differ between products for several reasons

➤ 2.1 The production time may differ between products.

Products which can be produced quickly will have elastic supply, for example, pencils and notebooks can be produced within a few days. Price elasticity of supply will be elastic for such products. By contrast, in agricultural markets, the supply of fresh fruits and vegetables depends on the time it takes to harvest them. It takes months for crops to be harvested and be ready for sale. Climatic conditions are beyond the control of the suppliers. Hence, supply is less responsive to changes in price in the short run. The supply is inelastic for agricultural products.

➤ 2.2 The perishability and the level of stocks is not the same for all products.

Products which can be stored easily and are non-perishable will have elastic supply. Some types of stock (such as pencils ) are easier to store than others (such as fresh milk or fruits), so it will be easier to increase supply if prices increase. Thus, stocks that can be stored easily will have an elastic supply whereas stocks that are difficult to store will have an inelastic supply.

➤ 2.3 The availability of raw materials will determine the PES of a product.

Products which are made with raw materials in short supply will have inelastic supply. However, if a firm has unused raw materials, components and finished products that are available for use, then the firm is able to respond quickly to a change in price, as it can supply these stocks on to the market. Products whose raw materials are readily available will have a more elastic supply.

➤ 2.4 The degree of spare productive capacity will influence the PES for a product.

Products made by firms with spare capacity will have elastic supply. For example, a beverage company can produce 10 000 cans of soft drink in just 60 seconds, thus it is very easy for the company with plenty of spare production capacity to respond to changes in price. PES will be elastic. By contrast, if a firm does not have spare capacity for a product, it’s PES will be inelastic.

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