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Examine how quickly producers can adjust their output in response to price changes and the role of time horizons.
Why does a sudden craze for a new toy lead to empty shelves for months, while a surge in digital movie rentals doesn't cause a single glitch? The secret lies in how fast a business can 'stretch' its output.
Quick Check
If a 10% increase in the price of gold leads to only a 2% increase in the amount of gold mined, is the supply elastic or inelastic?
Answer
Inelastic, because the PES is 0.2 (), which is less than 1.
Why can some firms react faster than others? Several factors dictate PES: 1. Spare Capacity: If a factory is running at 50% capacity, it can easily ramp up production (Elastic). If it's at 100%, it cannot (Inelastic). 2. Resource Availability: Can the firm easily acquire raw materials? If resources are rare (like diamonds), supply is inelastic. 3. Factor Mobility: How easily can labor and capital move from one task to another? If workers are highly specialized, shifting them to new roles takes time. 4. Inventory Levels: Firms with high stock levels can respond to price spikes immediately by releasing inventory.
Imagine two car manufacturers. Company A is running three shifts 24/7. Company B is running only one shift and has two idle assembly lines. If car prices rise by 15%: 1. Company A must build a new factory to increase output (High cost, long time). 2. Company B simply hires more workers for the idle lines (Low cost, short time). 3. Result: Company B has a much higher than Company A.
Quick Check
Which would likely have a more elastic supply: a software app or fresh organic strawberries?
Answer
The software app, because it can be replicated instantly at near-zero cost, whereas strawberries require a growing season and specific land.
Time is the most influential factor for PES. Economists divide this into three periods: 1. The Momentary Period: Supply is fixed. Producers cannot change any inputs. PES is nearly 0. 2. The Short-Run: At least one factor of production (usually capital/land) is fixed, but others (labor/raw materials) are variable. Supply becomes more elastic. 3. The Long-Run: All factors of production are variable. Firms can build new factories or exit the industry. Supply is at its most elastic.
Industries with inelastic supply in the short run (like oil or farming) experience high price volatility because supply cannot adjust quickly to demand shocks.
Consider a sudden 20% increase in the price of apartments in a city: 1. Momentary: Supply is perfectly inelastic () because you cannot build an apartment overnight. 2. Short-Run: Landlords might convert basements or spare rooms into rentals. Supply increases slightly (). 3. Long-Run: Developers get permits and build new high-rises. Supply increases significantly (). 4. Conclusion: Price spikes are most severe when supply is in the momentary or short-run phase.
If the price of a product increases by 20% and the quantity supplied increases by 40%, what is the PES?
Which of the following would make the supply of a product MORE inelastic?
In the momentary period, the Price Elasticity of Supply is usually perfectly elastic.
Review Tomorrow
In 24 hours, try to explain to a friend why the price of fresh fish fluctuates daily while the price of canned tuna stays stable, using the concept of PES.
Practice Activity
Research a recent 'supply chain crisis' (like the semiconductor shortage). Identify which determinant of PES made it difficult for manufacturers to respond to the price increase.