Key Idea: Topic 2.6 explains how responsive producers are to price changes (PES), what determines it, and why it matters for price volatility in commodity markets.
📐 Price elasticity of supply (PES)
PES = \\frac{\\%\\Delta Q_s}{\\%\\Delta P}
- PES > 1 → elastic (responsive — flat curve)
- PES < 1 → inelastic (unresponsive — steep curve)
- PES = ∞ → perfectly elastic (horizontal)
- PES = 0 → perfectly inelastic (vertical)
🔑 Determinants of PES
- Spare capacity — excess capacity → elastic (can increase output quickly)
- Stocks/inventories — high stocks → elastic (release stored goods)
- Factor mobility — easy to switch resources → elastic
- Time period — longer time → more elastic (build new capacity)
- Nature of product — agricultural goods → inelastic (growing seasons); manufactured → elastic
⏱️ Time horizons
- Momentary run → perfectly inelastic (cannot change output at all)
- Short run → relatively inelastic (limited flexibility)
- Long run → more elastic (build factories, hire workers, enter/exit market)
📊 PES and market volatility
- Inelastic supply + demand shift → large price swings, small quantity changes
- Elastic supply + demand shift → small price changes, large quantity changes
- Explains why oil, wheat, and coffee prices are volatile — supply is inelastic in the short run
In diagram questions: inelastic supply = steep curve → demand shift causes a BIG price change. Always link PES to the steepness of the curve.