Economics

Study Notes

Elasticity of Supply of Different Products

Level:
AS, A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Price elasticity of supply is a measure of the sensitivity of (quantity) supplied of a good or service to a change in the price of that good or service.

Overall, the supply of manufactured goods tends to be more price elastic than the supply of agricultural goods:

Manufactured products

  • Mass production using integrated production lines - exploiting technical economies of scale
  • Easier to store finished goods
  • Firms have spare capacity / can lay on extra production shifts

Agricultural goods

  • Often harder to store because goods are perishable / expensive to keep refrigerated
  • "Set growing seasons" might mean production period is longer (although new technologies now allow farming to continue 365 days a year)
  • Unpredictable supply because of the impact of volatile climate
New house-building in the UK

Low price elasticity of supply for new housing

Production time frame:

  • It can take years for a housing project to be completed
  • Delays in planning process e.g. if local people complain

Limited spare capacity / low stock levels:

  • Housing supply can be restricted by shortages of skilled labour
  • Other factor inputs used in construction such as cement, bricks may also be in scarce supply

The supply of new housing is usually inelastic.
Therefore house prices are determined mainly by demand-side factors

However, new technology might be increasing the price elasticity of supply for some types of housing. The emergence of "flat-pack" housing units and additive manufacturing (i.e. using giant 3D printers in the construction process) might reduce the time frame in which new housing can be built and made available. Housebuilding has seen relatively little significant process innovation over recent decades, but the next ten years may seen notable improvements in modular construction with sustainable homes built to a high standard and much more quickly than in the past.

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