Defined as The responsiveness of quantity supplied to a change in price #testanswer
Has the exact same formula, except quantity supplied, not demanded. | Elasticity | Elasticity coefficient | Interpretation of Elasticity Coefficient | | ------------------- | -------------------------- | ------------------------------------------------------------------------------ | | Elastic | $E>1$ | Percentage change in QS is greater than the percentage change in price. Relatively close substitutes | | Inelastic | $E<1$ | Percentage change in QS is lesser than the percentage change in price. Not many close substitutes | | Unitary | $E=1$ | Percentage change in QS is equal to percentage change in price | | Perfectly Inelastic | $E=0$ | Percentage change in QS is independant to change in price; it is unresponsive. No substitutes usually. | | Perfectly Elastic | $Ed=\infty$ | A small change in price will lead to a complete drop in QS or increase. Many close substitutes. |
The distinction between goods that are price elastic and price inelastic in supply
Basically demand but supply'd
Determinants of PES
Time
Similar to demand; in the short run, goods will be priced inelastic because they won't be responsive.
In the long run, there is more time for firms to respond to price changes
Nature of the industry
What kind of industry it is. A market that produces pencils can easily change production, whereas in a market for agriculture, there is heavy time taken for production.
Ability to store inventories
If a business is able to easily store inventories, then it is going to more responsive and elastic in supply
Significance of Price Elasticity
Significant to firms
Monopoly/Market power - setting prices to influence $TR$
Price Discrimination: To maximise $TR$
Significant to households
Can control demand if aware of elasticity and influence on prices
Significant to Government
Tax Incidence
Inelastic - greater incidence on consumers, greater tax revenue
Elastic - lesser incidence on consumers, lower tax revenue