06. A closer look at supply: Price elasticity of supply

Question 1

What is the price elasticity of supply?

Answer 1

Price elasticity of supply (PES) is a measure of the responsiveness of quantity supplied to changes in price.

Question 2

How do you calculate PES?

Answer 2

PES = % change in Qs / % change in Price

Question 3

What is the range of PES?

Answer 3

A) 1 < PES < ∞ : PES elastic, change in Qs is greater than change in price.
B) 0 < PES < 1 : PES inelastic, change in Qs is less than change in price.
C) PES = 1 : Unit elastic, change in Qs is equal to change in price.

Question 4

What are the determinants of price elasticity of supply?

Answer 4

1) How much costs rise as output increases.
2) The time period considered.
3) The ability to store stock.

Question 5

How much costs rise as output increases.

Answer 5

• If total costs rise significantly as a producer tries to increase output, it is likely that the producer will not increase supply until there is a very large increase in price.
  a) existence of unused capacity. If resources are not fully used, PES will be relatively elastic.
  b) The mobility of factors of production. If resources are easily moved from production of one product to another, PES will be relatively elastic.

Question 6

The time period considered.

Answer 6

• The amount of time over which PES is measured will affect its value. In general terms, the longer the time period considered the more elastic the supply will be.
• In the immediate time period, firms are not really able to increase their supply very much, if at all, if price increases, since they cannot immediately increase the number of factors of production that they employ. The value of PES will be very inelastic.

Question 7

The ability to store stock.

Answer 7

If a firm is able to store its stock, they will be able to react swiftly to price fluctuations. These products will be relatively elastic.