Price Elasticity of Supply and the Factors Affecting It

Supply

Supply refers to the quantity that producers want and able to provide for the market at a given price in a given time period. (Murrad), The basic law of supply is that as the price of a product rises, producers expand their supply onto the market.

S3

S1

S2

On a supply curve, price and quantity, rising together are said to have a positive relationship assuming Ceteris Paribus.

If the price of the good differs, there is change along a supply curve.

If the price of the product rises from P1 to P2 there is an expansion of supply [S2] in the market.

If the price of the product falls from P1 to P3 there would be a contraction of supply [S3] in the market.

Theory of Supply in tourism, leisure and hospitality industry (Airline)

When there is increase in the price of the products or services, the quantity supplied will increase as well.

For Example Expansion of supply

In the peak season and holiday period, the price of airline ticket will raise and demand for the same is high and the airlines are willing to supply more travelers by operating more frequent flights.

Contraction of Supply

The contraction of supply happens in the off-peak season of the year where most people are not willing to travel. The demand for the travel ticket is low and the tourism and travel firms are forced to reduce the rates of the air tickets. So, when there is drop in price and quantity demanded, the supply of the products or services are contracted.

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Shifts in the Supply Curve

If the supply curve shifts to the right (from S1 to S2) this is an increase in supply; more is provided for sale at each price. If the supply curve moves inwards from S1 to S3, there is a decrease in supply meaning that less will be supplied at each price.

Factors that causes the Supply of the Quantity

The price which the producer can obtain for the product

The prices of the other goods

The costs of producing the product, which will, in turn, depend upon the wider environment, such as labor costs, tax rates etc.

Changes in technology may reduce the costs of production and stimulate a higher level of supply to the market

Seasonal variations or changes in climate – Producers of traditionally seasonal products will produce goods in anticipation of increase demand.

Price

The price of product plays major role in supply of any product or services. If demand of any product is more in market then supplier increases the price of product to get more profit but if demand is less of product then he have to decrease the price to stay in the market.

Price of the other goods

The price of the other products will affect the supply, for example the air travel supply number of customers use air travel will reduce when there are other modes of travel available cheaper than the flight tickets

For an instance there are coaches available to France, this might reduce the air travel when the price is comparatively lesser than the air tickets

The costs of producing the product

The costs of producing the product or services can cause the supply of the service.

Lower costs of production mean that a business can supply more at each price. 

The hike in the fuel price, airport charges and the government taxes will increase the production costs of the airline industry. If the cost increases the price of the products or services will increase.

If the costs of production increase a rise in the price of raw materials and taxes, then businesses cannot supply at the same price and this will cause an inward shift of the supply curve.

Changes in production technology

The technology development can influence the supply of the products or services. The technological changes can reduce the process cost and the process will be more efficient.

For Example in the airline industry

The technology and software used to take on-line bookings, pre-arrival check-in process, and e-ticketing are the advancement for the airline industry.

Changes in climate

The effect of climatic conditions can exert a great influence on market supply. Unfavorable weather conditions like snowfall, poor visibility and other natural calamities like ash clouds from volcano will lead decrease in supply.

Price Elasticity of Supply (PES)

Definition of price elasticity of supply (PES)

A measure of responsiveness of quantity supplied of product X to a change in its own price

The formula for price elasticity of supply is:

PES = % change in quantity supplied of X

% change in price of X

Pes > 1, then supply is price elastic

Pes < 1, then supply is price inelastic

Pes = 0, supply is perfectly inelastic

Pes = infinity, supply is perfectly elastic following a change in demand

PES will be greater (more elastic)

The more mobile are factors of production

The longer the time period

The less risk-averse the producer

The fewer the natural constraints on production.

Graphical Illustation

(Adapted from John Tribe (2004), The Economics of Leisure and Tourism)

If supply is elastic, producers can increase output without a rise in cost or a time delay

If supply is inelastic, firms find it hard to change production in a given time period.

Factors Affecting Price Elasticity of Supply

The following are the main factors which influence the price elasticity of supply:

Time Period

Availability of stocks

Spare capacity

Flexibility of capacity/ Resource Mobility

Time period

Generally the longer the time period allowed, the easier it is for the supply to be changed.

Supply is more price elastic – longer time period allowed

For example, if there is a sudden increase in demand for air travel from Edinburg to London due to a coach or rail strike, airlines will not be able to provide more supply at that given time.

The sustained airlines can meet the quantity demanded by leasing extra planes or transferring planes from less used routes to increase supply in a short run.

In the long run, new planes can be purchased to meet the increase in supply.

Availability of Stocks

In the manufacturing industry, the availability of stocks of goods is at their warehouse which enables supply to be more flexible and more elastic.

In the hospitality and tourism industry, most of the products or services are more perishable which cannot stored like rooms, air tickets, customer service. The supply is inelastic in the short run.

Spare capacity

The existence of spare capacity either in terms of service capacity or manufacturing capacity will make supply more elastic.

For example

The airlines that have spare aircraft available for deployment when the supply of its services increases.

Flexibility of capacity/ Resource Mobility

Flexibility of capacity means that resources can easily be shifted from provision of one good or service to another.

For example

Flexibility of the staff is also a key factor where in many organizations train staff to be multi-skilled to enable them to shift from one task to another when temporary requirement arise. The supply will be more elastic.

In other hand the supply of specialist products or services require the use of specialist skills or machines. The pilot training needs longer period and this can make the supply of air travel inelastic in short run.

Supply curves with different price elasticity of supply