17 Nov Explain why the price elasticity of supply for manufactured goods such as computers, clothing and books is generally higher than price elasticity of supply for agricultural goods such as grains, corn and cotton.
PES measures the degree of responsiveness of the quantity supplied for a good to a change in the price of the good itself, ceteris paribus
PES for manufactured goods such as computers, clothing and books is generally higher than price elasticity of supply for agricultural goods such as grains, corn and cotton, due to:
Availability of Stock
Firms with larger availability of stocks are more able to respond to price changes. Hence, supply of durable goods such as computers, clothing and books is more price elastic than the supply of perishable goods. This is because perishable goods (e.g. agricultural goods) cannot be stored for long periods of time. Given an increase in price of vegetables, producers cannot increase the quantity of vegetables supplied to the markets easily as they are unable to draw from their stocks / inventories.
The larger the availability of stocks, the larger the increase in quantity supplied that firms will be able to bring into the market, accounting for the larger PES value.
Time Period
Firms can better respond to price changes by altering their quantity supplied if a longer time period was allowed.
e.g. agricultural goods have long gestation period –> producers have lesser ability to respond quickly to price changes.
Existence of Spare Capacity
Firms may have the capacity to increase production when existing capacity is not fully utilised.
Should the firms be already operating close to full capacity, it will be difficult for them to increase quantity supplied in response to a price rise. Therefore, the greater the spare capacity, the higher is the PES and the more price elastic the supply.
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