Price Elasticity of Supply
A measure of the responsiveness of quantity supplied when there is a change in price.
The PES for primary commodities is generally lower than for manufactured products. This is due to the following reasons listed below.
Time
The time required to adjust production is a critical factor in determining PES.
- The production of primary products takes a long time. Even with abundant resources available, not much can be achieved.
- This makes the supply of primary commodities relatively price inelastic in the short run.
- In contrast, manufactured goods can often be produced quickly. Factories can increase output by working overtime, hiring additional workers, or using existing machinery more intensively.
- This makes the supply of manufactured goods more price elastic in the short run.
In the short run, products like agricultural goods take a long time to plant and grow. Meanwhile, oil and minerals require a lot of time to make investments and production.
Comparatively, manufactured goods like technological devices can be mass-produced easier in comparison.
However, in the long run, primary commodity producers can change factors of production to be able to provide yields at a faster rate by using better technologies, farming practices, larger land, etc.
The same applies to manufactured goods producers as well.
Inventory (Stocks)
The ability to store products also affects PES.
- Many primary commodities are perishable and cannot be stored for long periods (many types of food expires quickly).
- This reduces the ability of producers to respond to price changes, making supply more inelastic.
- Manufactured goods are often easier to store. Firms with large inventories can quickly release goods into the market when prices rise.
- This makes them more responsive and their supply relatively elastic.
- Why is the PES for primary commodities generally lower than for manufactured products?
- How do the determinants of PES explain this difference?
- Can you think of examples where the PES of a primary commodity might be higher than usual?
To what extent should primary sectors be allowed to gain protection from low price elasticity of supply, price elasticity of demand and income elasticity from the government?
