CIMA BA1 Syllabus B. Microeconomic And Organisational Context Of Business - Price Elasticity Of Supply - Notes 3 / 3
Price elasticity of supply
= A measure of the responsiveness of quantity supplied to a change in price.
Price elasticity of supply reflects the ability of firms to increase output when demand rises.
Influences on price elasticity of supply
If the market price of a product rises, producers will want to increase supply.
Their ability or willingness to do this (ie the price elasticity of supply) will be greater if:
The time period since the price changed is longer (allowing a firm more time to organise extra production)
The cost of attracting more factors of production (eg labour, capital) is lower
Excess inventories are available which can be used to supply the market
There is spare capacity (meaning that it is easy for a Firm to increase production levels)
Illustration
Below you can see how the supply of Pizza has changed following changes to their prices.
Calculate price elasticity of supply for Pizza, to two decimal place.
| Price | Quantity supplied | |
| Before | $10 | 200 |
| After | $12 | 250 |
[(250 - 200) / 200] / [(12 - 10) / 10] = 1.25