The important thing with P.E.S. is not to get it mixed up with Price Elasticity of Demand. So read the question carefully or else you will get zero for going on about demand when you should be talking about supply!
So, here is the much anticipated P.E.S. formula:
P.E.S. = (% Change in quantity supplied) / (% Change in price)
The graphs are easy to remember as they're essentially the same as the P.E.D. diagrams - only we are talking about supply here.
Obviously when using the above formula,
where P.E.S.<1 there is inelasticity.
A P.E.S >1 equals elasticity.
Also P.E.S. = 1 when the supply curve passes through the origin.
Determinants of P.E.S.
Time is an important factor in that some goods and services take time to respond to P.E.S. For example increasing the supply of oil by discovering a supply and then building an oil rig takes a long time and so in the short term the P.E.S. of oil will be inelastic. In the long term though, it may well become elastic in that the price of oil is increasing so there are more suppliers willing to supply at the higher price due to higher profit margins.
Stockpiles and reserves are an important because a firm with excess stock can respond to a change in price far quicker. Stocks of finished goods mean that when the price or demand increases, the supplier simply ships the finished goods rather than having to manufacture them first.
Take sandwiches for example. An employee works at maximum output and soon the pile builds up. Suddenly the market price increases - probably due to increased demand for sandwiches - and so the sandwich company can respond quickly to this change in price and so can supply the market quicker than competitors can. And so the firm has an edge. Hence in these industries we can expect an elastic P.E.S.
The cost of hiring resources is next. If hiring capital goods such as machinery and labour are high then profit margin will be cut. If the firm sells the finished good at a market price of £x then this is the revenue. The costs including hiring resources are then deducted from this leaving gross profit. The point is, if profit levels are reduced firms may be less responsive to price fluctuations as they aim to maximise profits primarily and so if prices fall for example don't see the appeal of producing more of that product.
The ease of switching production between products is derived from the previous point. If say the price of burgers increases and so producing burgers becomes more profitable, switching to supplying burgers rather than hot-dogs is an easy transition and so as a catering firm finds it easy to switch, P.E.S. is elastic. This is not the case with car firms. It takes years to shifting production to a new style of car. following emissions pressures, Aston Martin switched some production from Supercars such as the DBS to the Compact City market with the Cygnet. This was not an easy process...
The state of industry is significant in that an industry operating at full capacity cannot respond to a surge in demand / price so P.E.S. is inelastic. However firms which aren't working at full capacity (they can produce more in a given time as they have the resources and storage to do so) can easily respond and so have an elastic P.E.S.
So, I hope that the pattern is emerging. Supply responsiveness = elastic.
Irresponsiveness = inelastic
Obviously when using the above formula,
where P.E.S.<1 there is inelasticity.
A P.E.S >1 equals elasticity.
Also P.E.S. = 1 when the supply curve passes through the origin.
Determinants of P.E.S.
Time is an important factor in that some goods and services take time to respond to P.E.S. For example increasing the supply of oil by discovering a supply and then building an oil rig takes a long time and so in the short term the P.E.S. of oil will be inelastic. In the long term though, it may well become elastic in that the price of oil is increasing so there are more suppliers willing to supply at the higher price due to higher profit margins.
Stockpiles and reserves are an important because a firm with excess stock can respond to a change in price far quicker. Stocks of finished goods mean that when the price or demand increases, the supplier simply ships the finished goods rather than having to manufacture them first.
Take sandwiches for example. An employee works at maximum output and soon the pile builds up. Suddenly the market price increases - probably due to increased demand for sandwiches - and so the sandwich company can respond quickly to this change in price and so can supply the market quicker than competitors can. And so the firm has an edge. Hence in these industries we can expect an elastic P.E.S.
The cost of hiring resources is next. If hiring capital goods such as machinery and labour are high then profit margin will be cut. If the firm sells the finished good at a market price of £x then this is the revenue. The costs including hiring resources are then deducted from this leaving gross profit. The point is, if profit levels are reduced firms may be less responsive to price fluctuations as they aim to maximise profits primarily and so if prices fall for example don't see the appeal of producing more of that product.
The ease of switching production between products is derived from the previous point. If say the price of burgers increases and so producing burgers becomes more profitable, switching to supplying burgers rather than hot-dogs is an easy transition and so as a catering firm finds it easy to switch, P.E.S. is elastic. This is not the case with car firms. It takes years to shifting production to a new style of car. following emissions pressures, Aston Martin switched some production from Supercars such as the DBS to the Compact City market with the Cygnet. This was not an easy process...
The state of industry is significant in that an industry operating at full capacity cannot respond to a surge in demand / price so P.E.S. is inelastic. However firms which aren't working at full capacity (they can produce more in a given time as they have the resources and storage to do so) can easily respond and so have an elastic P.E.S.
So, I hope that the pattern is emerging. Supply responsiveness = elastic.
Irresponsiveness = inelastic
