Factors that affect the price elasticity of supply

Factors that affect the price elasticity of supply Price elasticity of supply is a useful concept when we consider supply. It is also use to measure the responsiveness supply to a change in price when we are supplying a good. Below is the formula that use to calculate the price elasticity of supply. Price elasticity of supply (PES) = % change in quantity supplied % change in price There are a few factors that affect the price elasticity of supply. The first factor that affects the determinants of price elasticity of supply is the number of producers. If there are a lot of producers, the easier for the industry to increase the output and cause the price increase. For example, according to the law of supply, the price of a good increase, the quantity supplied of the good increase. Thats why when there are a lot of producers, more goods will be produced and caused the price increase. Besides that, another factor that affects the price elasticity of supply is the time factor. Long run is usually more elastic for supply compare with short run. For example, in the long run period the industry can invest more equipment and build more factories. In addition, they can even enter a new market and start a bigger business. However, in the short run, industry cant extend their factory to produce more goods. Besides that, the prices of the goods are not responsive to the price. Therefore, supply is more elastic in the long run. Part B Businesses always use the concept price elasticity to decide on their pricing strategy. The strategy that used by the businesses to decide their price is price elasticity of demand (PED). Price elasticity of demand can be define as the measurement of the rate of response of quantity demanded due to a price change. There is a formula that uses to calculate the price elasticity of demand. The formula is shown in the figure below. The percentage change in price The percentage change in quantity demanded PED = There are many degrees that show in price elasticity of demand. Price elasticity of demand will normally be a negative relationship between quantity demanded. To determine the degree of PED, ignore the negative sign. The first degree that shows in PED is inelastic demand. This is a degree that show the percentage change in quantity demanded is less than the percentage change in price. For example, 20% decrease in price cause a 10% increase in quantity demanded. The value is less than 1 but greater than 0 (0