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Determinants of PES

Syllabus: Explain the determinants of PES, including time, mobility of factors of production, unused capacity and ability to store stocks.

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Determinants of PES

Syllabus: Explain why the PES for primary commodities is relatively low and the PES for manufactured products is relatively high.

Just to be clear here is an alternative set of explanations:


This is especially important in agriculture - imagine a farmer producing and planning his crops. In the very short term (time) whatever he planted at the beginning of the growing season he has to sell and no matter what happens to the price of his crops he cannot increase (or decrease?) them. So the PES is perfectly inelastic (see above).

When deciding his crops for next year´s harvest he can then decide to increase his planting of certain crops and decrease his planting of other crops according to market prices but within the constraints of his land allocations. Therefore, the PES is relatively inelastic in the medium term
(see above).

However, when the time period is lengthy (long term) he can increase (buy) or decrease (sell) land in order to increase the growth potential of the farm. So in the long term PES is relatively elastic
(see above).

You can possibly see a similar pattern with manufacturing (factory size) but maybe not so pronounced.

Mobility of Factors of Production

Some industries use factors of production that are relatively mobile within and between industries. For example, only unskilled labour is needed in the clothing manufacturing industry (think sweatshops) and therefore can react quickly to price changes (sack or hire). Some industries however need highly skilled labour (think technology industries) and so to increase labour hiring, time for training needs to be taken into account (relatively inelastic).

Similarly, capital (machinery, technology) can be less important in labour intensive industries (relatively elastic supply) and more significant in capital intensive industries (infrastructure projects) - relatively inelastic supply.

Unused Capacity

If an industry has unused labour (unemployment) or capital then increases in price, ceteris paribus, can be accommodated by increases in output much more easily (relatively elastic).

Stored Stocks

Similarly if there are stocks (inventory) available then
increases in price, ceteris paribus, can be accommodated by increases in output much more easily (relatively elastic).