10-Price Elasticity of Supply (PES)

Question 1

Define Price Elasticity of Supply (PES)

Answer 1

It measures the Responsiveness of Quantity Supplied to a price Δ

Question 2

Formula for PES

Answer 2

%ΔQS / %ΔP

Question 3

PES > 1

Answer 3

PRICE ELASTIC SUPPLY
Quantity Supplied responds MORE than proportionately to price Δ

Question 4

PES < 1

Answer 4

PRICE INELASTIC SUPPLY
Quantity Supplied responds LESS than proportionately to price Δ

Question 5

PES = 1

Answer 5

UNIT ELASTIC SUPPLY
Quantity Supplied responds Proportionately to a price Δ

Question 6

PES = 0

Answer 6

PERFECTLY INELASTIC SUPPLY
Quantity Supplied does not respond to a price Δ

Question 7

PES = ∞

Answer 7

PERFECTLY ELASTIC SUPPLY
Infinite amount could be supplied at a certain Price

Question 8

Factors that influences PES

Answer 8

–> Time Period
–> Availability of Stocks/Perishability
–> Spare Capacity (Unutilized resources)
–> Production Speed
–> Mobility of Factors of Production
–> Legal Constrains

Question 9

Factors that influences PES
–> Time Period

Answer 9

In the Short Run at least one of The Factors of Production Is Fixed (LAND/CAPITAL) so firms can ONLY increase supply by altering variable Factors such as LABOUR. In the Long Run All the Factors of Production are variable.
So Supply is PRICE INELASTIC in the Short run and PRICE ELASTIC in the Long Run. Because firms get time to invest in Factors of Production and gives time for New Firms To Join in the Industry.
Agricultural Goods are PRICE INELASTIC in the short run as it takes several months for Supply to Increase

Question 10

Factors that influences PES
–> Availability of Stocks/Perishability

Answer 10

If a Firm has high level of stock then Supply will be PRICE ELASTIC as goods can be easily supplied to a price increase.
If a firm has low stock level or Produces Perishable Goods that cannot be stored then Supply will be PRICE INELASTIC

Question 11

Factors that influences PES
–> Spare Capacity (Unutilized resources)

Answer 11

If there is Plenty of Spare Capacity then Firms can Increase Supply by Utilizing Unused Resources (Idle Machinery) and Labor to a price increase this make Supply more PRICE ELASTIC

Question 12

Factors that influences PES
–> Production Speed

Answer 12

Goods with Similar Production Process and Can Be Produced Quickly will have PRICE ELASTIC SUPPLY.
If a good is complex and raw materials are scarce then supply will be PRICE INELASTIC SUPPLY

Question 13

Factors that influences PES
–> Mobility of Factors of Production

Answer 13

Supply will be PRICE ELASTIC if Capital and Labor are Occupationally Mobile as it makes it easier to Reallocate Resources From one use to another. Eg- A printer press can switch from magazines to greeting cards easily.
If a firm has highly Specialized Equipment and employees, Supply will be PRICE INELASTIC

Question 14

Factors that influences PES
–> Legal Constrains

Answer 14

Supply will be PRICE INELASTIC if its difficult for new firms to enter the industry due to legal constrains. Eg- Many regulatory requirements