1.2.5 - Elasticity of supply

Question 1

Define Price Elasticity of Supply (PES)

Answer 1

. PES measures the responsiveness of quantity supplied to a change in price

Question 2

Is PES always a positive number?

If so, why?

Answer 2

. PES is always positive due to the law of supply.

.When price goes up, quantity supplied increases(positive/ positive = positive).

. When price goes down, supply decreases(negative/ negative = positive)

Question 3

Name the determinants of price elasticity of supply

Answer 3

. Production Lag
. Stocks
. Spare Capacity
. Substitutability of Factors of Production
. Time

• PSSST

Question 4

Explain Production Lag

Answer 4

. The longer the production lag for a good a service, the more price inelastic supply. This is as if there is a large production lag, it will make it harder for suppliers to RESPOND to changes in demand and price

E.g. agricultural good have a large production lag, making it harder for suppliers to respond

. If the production lag was short for a good or service, the good or service will be price elastic, as its easier to RESPOND to change in price and stock

Question 5

Explain Stock

Answer 5

. The larger the level of stock, the more price elastic supply will be. It will be easier to respond to a change in price and demand

. The lower the level of stock, the more price inelastic supply will be. It will be harder to respond to a change in price and demand

Question 6

Explain Spare Capacity

Answer 6

. The more spare capacity, the more price elastic supply is going to be.

.This is as it is much easier for them to respond to changes in demand and price. To increase production, a business simply needs to utilise its unemployed factors of production (e.g. land, labour and capital)

. If spare capacity of a business is low, the more price inelastic

Question 7

Explain Substitutability of Factors of Production

Answer 7

. The more substitutability the factors of production in a business is, the more price elastic supply is.

. This is as the more substitutable, the easier it is for them to respond to be changes in price and demand.

. For example, if a firm is producing vans and cars and demand and thus price of vans increases, with substitutability of factors of production, labour and capital currently producing cars can be transferred to produce vans, increasing the supply of vans easily.

Question 8

Explain Time

Answer 8

. Supply is Price Elastic in the long run. In the long run all factors of production are variable. This means that it is easier for firms to increase their production in the long run by increasing any of the factors of production.

. Supply is Price Inelastic in the short term. In the short run there is at least one fixed factor of production. It is harder to change factors of production in the short run, since at least one of them is fixed. Only labour can increase easily in the short run.

Question 9

What two words should you NEVER use in economics?

What should you instead use?

Answer 9

. Short term and Long term

. You should instead use Short Run and Long Run

Question 10

Define Long Run

Answer 10

. the period of time where ALL factors of production are variable

Question 11

Define Short Run

Answer 11

. the time period when at least one factor of production can be varied.

. This is usually one or two factors of production (capital and land)