Unit 1 Micro Revision

1. Unit 1 Micro
Price Elasticity of
Supply

2. Diagrams matter!
Diagram must haves
Fully labeled
Original and new equilibrium
Demand and supply the correct way round
Well explained – you must explain why the
curve has shifted, in detail
Think about the elasticity – e.g. oil has
inelastic demand and supply

3. Price elasticity of supply

4. Elasticity of Supply
• Price elasticity of supply (Pes) measures the
relationship between change in quantity
supplied and a change in price.
• (1) When supply is elastic, producers can
increase production without a rise in cost or a
time delay
• (2) When supply is inelastic, firms find it hard
to change their production levels in a given
time period

5. Formula for Price Elasticity of Supply
• The formula for price elasticity of supply is:
• Percentage change in quantity supplied
divided by the Percentage change in price
• The co-efficient of elasticity of supply is
positive, because an increase in price is likely
to increase the quantity supplied to the
market

6. PES Co-efficient
ES > 1
price-elastic supply
ES = 1
unit-elastic supply
ES < 1
price-inelastic supply
Es = 0
perfectly inelastic supply
Es = infinity
perfectly elastic supply

7. Elastic supply (PES > +1)
Price
S1
P2
P1
D1
Q1
Q2
D2
Output

8. Inelastic supply (PES < +1)
S1
Price
P2
P1
D1
Q1 Q2
D2
Output

9. Price elasticity of supply
The market for tractors is supplied by two firms, X and
Y, each initially having 50 % of the market.
A 10 % increase in the price of tractors leads to an increase
in output from firm X of 10 % and from firm Y of 20 %. What
is the price elasticity of supply of tractors in this market?

10. Price elasticity of supply
The market for tractors is supplied by two firms, X and
Y, each initially having 50 % of the market.
A 10 % increase in the price of tractors leads to an increase
in output from firm X of 10 % and from firm Y of 20 %. What
is the price elasticity of supply of tractors in this market?
Price change = 10%, total output change is 15%
Therefore the price elasticity of supply = +1.5

11. Elasticity of supply

12. When demand for a good increases, equilibrium price
stays the same. What is the elasticity of supply?
Sketch this situation in the supply and demand diagram
on the left (below)
Price
Price
D1
D2
Quantity
Quantity

13. When demand for a good increases, equilibrium price
stays the same. What is the elasticity of supply?
Sketch this situation in the supply and demand diagram
on the left (below)
Price
Price
P1
S1
D1
D2
Quantity
Quantity

14. When there is an increase in demand for a product, the
rise in equilibrium price is large but the expansion in
quantity produced is small. What is the elasticity of
supply? Sketch the situation in the supply and demand
diagram on the right (below)
Price
Price
P1
S1
D1
D2
Quantity
D1
D2
Quantity

15. When there is an increase in demand for a product, the
rise in equilibrium price is large but the expansion in
quantity produced is small. What is the elasticity of
supply? Sketch the situation in the supply and demand
diagram on the right (below)
Price
Price
P1
S1
S1
D1
D2
Quantity
D1
D2
Quantity

16. When there is an increase in demand for a product, the
rise in equilibrium price is large but the expansion in
quantity produced is small. What is the elasticity of
supply? Sketch the situation in the supply and demand
diagram on the right (below)
Price
Price
P1
S1
S1
P1
D1
D2
Quantity
D1
Q1
D2
Quantity

17. When there is an increase in demand for a product, the
rise in equilibrium price is large but the expansion in
quantity produced is small. What is the elasticity of
supply? Sketch the situation in the supply and demand
diagram on the right (below)
Price
Price
S1
P2
P1
S1
P1
D1
D2
Quantity
D1
Q1
D2
Q2 Quantity

18. Factors affecting PES
• Factor substitution
possibilities following a
change in demand for the
product
– When factor substitution
is possible and can be
achieved at low
cost, supply will be elastic
– When factors are highly
specialized, substitution
may be harder and thus
supply will be inelastic
A good example is the alternative
uses to which farm land can be
put when demand conditions
change – the time lag in switching
production from one crop to
another

19. Factors affecting PES
• Spare production capacity
available
• When there is spare
capacity, businesses can
expand output easily to meet
rising demand without
upward pressure on costs

20. Factors affecting PES
• Stocks (inventories)
available to meet
demand
• A low level of stocks
makes supply
inelastic in the short
term
• When stocks can be
released onto the
market, supply is
elastic
A high level of inventory (stocks)
means that fresh supplies can be
taken to market quickly – supply will
be elastic

21. Factors affecting PES
• The time frame allowed
– 1/ Momentary period
(fixed supply)
– 2/ Short run (inelastic
supply)
– 3/ Long run (elastic
supply)
• Artificial limits on supply
– E.g. the impact of patents
that limit which firms can
supply a product

22. Give three reasons why an industry’s supply
curve might be price elastic in the short term
Spare
capacity
High stock
levels
Short
production
times

23. Inelastic supply of new housing
• The supply of new
housing
– Planning permission
+ availability of land
to develop +
shortages of skilled
labour
– Time lags in the
production process
– new housing
developments take
months to complete

24. Supply elasticity factors
Temporary workers can
help to relieve shortages
of labour and improve the
elasticity of supply

25. Supply elasticity factors
Temporary workers can
help to relieve shortages
of labour and improve the
elasticity of supply
In many agricultural
markets, the delay
between planting and
harvesting makes supply
inelastic in the momentary
period