Questions• Explain whether primary commodities are likely

to have a low or high PED.• Explain whether manufactured goods are likely to

have a low or high PED.• Explain whether primary products have a low or

high YED? What does this mean for the producers of primary products? What implications does this have for countries who specialise in exporting primary products?

• Explain whether primary products have a low or high YED? What does this mean for the producers of primary products? What implications does this have for countries who specialise in exporting primary products?

Explain the significance of the following figures for a business• PED= -0.3• YED= -2• XPED of product A with respect to a

change in the price of product B is 0.6

Supply

Lesson Objectives

• To be able to define ‘supply• To be able to illustrate and explain a

movement along a supply curve and a shift of the supply curve including the causes

• To understand and be able to calculate Price Elasticity of Supply (PES)

• To understand what influences PES

Supply• The quantity of goods that sellers

are willing and able to sell at any given price over a period of time

• As the price of a product rises the quantity supplied of the product will usually increase, ceteris paribus

• Assumes firms are motivated by profit (so does not apply to much of what is produced by the gov.)

Quantity

S1

P1

P2

Q1 Q20

Price

• If the price of a product changes then there will be a movement along the supply curve (extension or contraction of supply)

• Any other factors affecting supply will cause a shift in the supply curve

Shifts of the supply curve

• RATNESTS

• Raw materials (cost of)

• Alternate goods (producers can produce different goods with same resources)

– Some goods are in ‘competitive supply’– A rise in the P of one product will cause

the supply of that product to extend and the supply of other products to decrease

– Example- a firm can produce skateboards and roller skates with the same resources, if the price of skateboards increased, the firm is likely to switch production from roller skates to skateboards thus extending the supply of skateboards and decreasing supply of roller skates

– Other goods are in ‘joint supply’– Eg. Petrol and paraffin, a rise in the

price of petrol will cause the supply of petrol to extend and the supply of paraffin to increase

– Show on 2 diagrams

• Taxes- indirect taxes (Eg. VAT)• New firms entering the market/ firms

leaving the market• Expectations• Seasons incl. weather conditions• Technology• Subsidies

Show.…• What would happen to the supply of coal if

a large coal mining firm had an increase in the cost of their machinery

• What would happen to the supply of mopeds if there were a large increase in tax on mopeds

• What would happen to the supply of white bread if a firm were to discover that there had been a large increase in the demand for brown bread which they could also produce

Producer Surplus

The difference between the market price a firm receives and the price at which it would be prepared to supply The area P0P1E therefore, are ‘surplus earnings’ for the firm/industry (sum of the producer surplus earned at every level)

S

P0

P1

Q1 Quantity

Price Producer Surplus

E

0

Producer Surplus

• Show the effect an increase in price will have on producer surplus

Activity for h/w

• Page 33 Exam question 4• Note:

Paper 1 in the IB exams:2x 25 mark questions in 1hr 30 mins1q= 45 minutesPart a (10 marks)= 15-20 mins (1-1 ½

sides of A4)Part b (15 marks)= min 25 mins (2-2 ½

sides of A4)

Elasticity of Supply

• PES measures the responsiveness of quantity supplied to changes in price

Calculating PES

% ∆ QS

% ∆ P

PES =

ExampleThe price of a product rises from £10 to £15 and supply rises from 200 to 500The PES will be …

Value Description of Response

Perfectly Inelastic

PES= 0 There is no response in supply to a change in price

Inelastic 0 <PES<

1

% Δ in quantity supplied is less than % Δ in price

Unitary PES= 1 The percentage change in quantity supplied equals the percentage change in price

Elastic 1 <PES>

∞

% Δ in quantity supplied is more than % Δ in price

Perfectly Elastic

PES= ∞ Producers are prepared to supply any amount at any given price

S (E=∞)

S ( E= 0)

Price

Quantity

Elasticity Of Supply The elasticity of supply of a straight line supply curve varies depending upon which axis it intersects or whether it intersects at the origin

Price Price

Quantity Quantity

S

S

Inelastic Supply Elastic Supply

Any straight line supply curve passing through the x axis has a PES of less than 1

Any straight line supply curve passing through the y axis has a PES greater than than 1

Price of coffee beans

Quantity of coffee beans

S2

Any straight line supply curve passing through the x axis has a PES of less than 1

Any straight line supply curve passing through the y axis has a PES greater than than 1

S1

Q2 Q1

P1

S1 (E=1) passes through origin

Quantity

Price

S2 (E=1) passes through origin

Any straight line supply curve passing through the origin has a PES of 1

Non-Linear Supply Curve

Price

Quantity

Elasticity of supply varies at different output levels.

At low output (where the supplier has plenty of spare capacity) supply is price elastic. Changes in demand can be met easily by changes in supply

As output rises, it moves closer to the production capacity of the producer, hence elasticity of price decreases, when capacity is reached PES=0

S

QuestionsCalculate PES and comment on elasticity

• Price increases from £4 to £6 and quantity supplied increases from 7m to 9m

• Price increases from £8 to £10 and quantity supplied increases from 2m to 5m

• Price increases from £8 to £10 and quantity supplied increases from 12m to 15m

Determinants of Elasticity of Supply

• Producer substitutes– Goods which a producer can easily produce as

alternatives eg. One model of car for another model in the same range

– If there are many substitutes then production can be altered quickly hence it’s elasticity will be relatively high

– If there are no substitutes, and price falls, the producer has no alternative but to continue production or withdraw from the market, hence elasticity is low

• Time– The shorter the time period, the more

difficult firms find it to switch from making one product to another, elasticity will, therefore be low in the short term

– In the long run supply will be more elastic (firms can buy more equipment, hire and train more staff)

– Eg. Agriculture

• Spare capacity– The more spare capacity there is, the

easier it is to increase output if price rises, hence supply is more elastic

• Number of producers– The more producers there are, the

easier it should be for the industry to raise output, hence supply will be more elastic

• Nature of product– Can product be stored?– Supply of fresh food is more inelastic

because it is perishable, – seats on an aeroplane?

Significance of PES

• Firms have a profit incentive to make their supply as elastic as possible- i.e. they can respond quickly to changes in price– Flexible resources– Stock levels

• Gov. seek to increase elasticity of supply of products– Quicker reallocation of resources, more

competitive– Raise mobility and flexibility of

resources- how do they try to achieve this?

Importance of Elasticity• Relationship between changes in price and total revenue• Importance in determining what goods to tax or subsidise

and what effect this will have on s & d• Importance in analysing time lags in production• Influences the behaviour of a firm• Impact on demand for exports and imports when the e/r

changes • Potential to exploit monopoly power in a market: The

extent to which a firm or firms with monopoly power can raise prices in markets to extract consumer surplus and turn it into extra profit (producer surplus)

• Impact of government intervention such as introducing a minimum price (price floor) or maximum price (price ceiling) into a market

Next Topic…

• Markets- equilibrium price and quantity