PES - primary vs manufacturedSyllabus: Explain why the PES for primary commodities is relatively low and the PES for manufactured products is relatively high.
A little more detail
If you look at the PES values for primary commodities and manufactured goods, you can see straight away that generally primary commodities have relatively low PES values (inelastic), while manufactured goods will tend to have higher values (more elastic).
So why is this? Look back at the determinants of the PES value that you looked at previously, you can start to identify why this might be the case. Remind yourself first, of the determinants of the PES value:
- The time period
- The substitutability of factors of production available to the firm
- Level of spare capacity within the firm
- Level of stocks available
In the table below is a comparison of two products - wheat (a primary commodity) and laptops (a manufactured good) - against each of these determinants.
|The time period||Relatively little opportunity to change supply - once planted, supply is effectively determined for a year||Supply is quite flexible - increased globalisation means increased production capacity can be brought on relatively quickly|
|Substitutability||Very difficult to substitute factors of production||Factors of production relatively easy to substitute|
|Capacity factors||Once fields have been planted for a season, capacity is effectively fixed. Only in the long-run can it be changed significantly.||New capacity can be brought in relatively easily - particularly ina ore global economy|
|Stocks||Relatively perishable and so difficult to hold stocks for any significant period of time||Stocks can be held, though these may date as specifications improve|
This helps us see why primary commodities will generally have a lower elasticity value than manufactured goods where production tends to be more flexible and therefore more elastic.
Having completed this session you should know and understand that:
1. The responsiveness of supply to changes in price is known as price elasticity supply.
2. Elasticity of supply is positive.
3. Supply is perfectly inelastic if its coefficient is 0; inelastic if it is between 0 and 1; unitary if it is exactly 1; elastic if it is between 1 and infinity; perfectly elastic if it is infinity.
4. Price elasticity of supply of a product varies with time, economic time (i.e. very short term, short term, long term, very long term). It also depends on the substitutability of the factors of production used in its manufacture.