Price Elasticity of Supply
* Price Elasticity of Supply:
* The degree of price elasticity of supply depends on how easily - and therefore quickly - producers can shift resources between alternative uses. Unlike PED, there is no Total Revenue Test for Price Elasticity of Supply. * Because there is a direct relationship between Price & Total revenue, they always move together.
DETERMINANT OF PRICE ELASTICITY OF SUPPLY: TIME!
THREE PERIODS: Market period--> short run --> long run
* Price Elasticity of Supply: the Market Period: The period that occurs when the time immediately after a change in market price is too short for producers to respond with a change in quantity supplied. * Suppliers cannot be picky with the price they sell their goods for * Some goods do not even have a market period (time is too short for any response) * It has a Vertical Supply Curve (meaning it is inelastic)
* Price Elasticity of Supply: the Short Run (fixed-plant period): supply is more elastic, but not terribly so, as the time period is short * The period of time is not enough to change the output significantly; producers have less time to react to the change * ex. if gasoline prices rise, in the short run, producers are stuck with their current less fuel efficient machines and still need to produce the same output. When given time to adjust, producers can introduce fuel efficient machines, and production cost will drop and yield more quantity supplied. Thus PES becomes more elastic * plants intensify production and output by working longer hours, having workers work overtime, and using all available resources to the max * It has a steeper slope than that of the supply curve in the long run
* Price Elasticity of Supply: the Long Run (variable-plant period): supply becomes more elastic over a longer period of time. * Why? because over time, new technology will adapt to the change in price to...
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