1.2 - Elasticity of supply

Question 1

What is the law of supply?

Answer 1

States that when there is an increase in price (ceteris paribus), producers will increase the quantity supplied.

Question 2

What is price elasticity of supply (PES)?

Answer 2

How responsive the change in quantity supplied is to a change in price

Question 3

How do you calculate PES?

Answer 3

= % change in quantity supplied / % change in price

Question 4

What does a PES value of 0 mean?

Answer 4

• perfectly price inelastic
  > QS is completely unresponsive to a change in P

Question 5

What does a PES value between 0 -1 mean?

Answer 5

• Relatively price inelastic
  > The % change in QS is less than % change in P
  > relatively unresponsive

Question 6

What does a PES value of 1- ∞ mean?

Answer 6

• Relatively price elastic
  > The % change in QS is more than % change in price
  > relatively responsive

Question 7

What does PES = ∞ mean?

Answer 7

• perfectly price elastic
  > Change in price means quantity supplied falls to zero
  > QS is extremely responsive to P

Question 8

What factors influence PES

Answer 8

• Mobility of the factors of production
  > if producers can quickly switch their resources between products, then PES will be more price elastic
• Availability of raw materials
  > If raw materials are scarce, then PES will be low (inelastic)
• Ability to store goods
  > If products can be easily stored (eg: are they perishable) , then PES will be higher (price elastic) as producers can quickly increase supply.
• Spare capacity
  > If prices increase for a product and there is capacity to produce more in the factories that make those products, then PES is higher (price elastic)
• Time period
  > In short run producers may find it harder to respond to an increase in prices as it takes time to produce the product.
  > However in long run, all factors of production become variable so they can produce more
• Barriers to entry
  > Can make it difficult to increase output or for firms to enter the market making PES inelastic. Difficult to increase supply with increase in price

Question 9

What are the 4 factors of production?

Answer 9

• land
• capital
• labour
• entrepreneurship

Question 10

What is a short-run period of production?

Answer 10

• Period of time in which at least one of the factors of production is fixed (this is a limiting factor)

Question 11

What is a long run period of production?

Answer 11

• Period of time in which all factors of production are variable (producers are able to vary all of their resources to respond to changing market conditions)