2.6 Supply Elasticity

Determinants of PES (AO2)

• Time: Given enough time, most goods are supply elastic as factories can be built/upgraded to provide for more supply. More time therefore increases PES.

• Mobility of factors of production: If it is easy to employ more people, buy more land, or build new capital, it is easier to supply more if needed. More mobility therefore increases PES.

• Unused capacity: If factories have unused machines, it is quite easy to increase supply. More spare capacity therefore increases PES.

• Ability to store: If the good is easy to store, excess supply can be stored for the future, in case the price increases. Better ability to store therefore increases PES.

• Rate at which costs increase: If it costs the firm a lot to make additional goods, it will hesitate before producing/supplying more. Higher additional costs therefore decreases PES.

(HL) Why is the PES for primary commodities generally lower than manufactured goods? (AO2)

Primary commodities often take longer to produce than manufactured goods, are harder to store, and have low mobility of factors of production. As an example, let's compare a primary commodity like wheat to a manufactured good like a smartphone:

Wheat (primary commodity with low PES): 

• Takes a whole year to plant seeds, water, and harvest.

• Becomes rotten after a while, and must be stored in special silos.

• Hard to acquire new fertile land to plant more.

Smartphones (manufactured good with higher PES):

• Output can be increased in just a few weeks.

• Can be stored in any warehouse for as long as needed.

• Easy to contract new factories to produce more.