1.2.5 Elasticity of Supply

Question 1

Price elasticity of supply (+ formula)

Answer 1

The responsiveness of supply to a change in price of the good.
%change in quantity supplied / % change in price

Question 2

Numerical values:

Answer 2

> Unitary elastic PES (PES = 1) - quantity supplied changes by the exact same percentage as price. It has a straight curve that starts at the origin.
Relatively elastic PES (PES > 1) - quantity supplied changes by a larger percentage than price, so supply is more responsive to price.
Relatively inelastic PES (PES < 1) - quantity supplied changes by a smaller percentage than price so supply is relatively unresponsive to price.
Perfectly elastic PES (PES = infinity) - a change in price means quantity supplied falls to 0. Very responsive. Horizontal line.
Perfectly inelastic PES (PES = 0) - a change in price has no effect on output so supply is unresponsive to price. Vertical line.

Question 3

Factors affecting PES:

Answer 3

> Availability of substitutes - if a good has a lot of producer substitutes, it will have high elasticity of supply. This is because the producer can easily switch production to these as an alternative. With few or no substitutes, elasticity is low.
Time - in the immediate term, supply is perfect inelastic, because they can only sell the amount of product they have, meaning quantity is fixed.
The Short term is the period of time when at least one factor of production is fixed, and the long term is when all factors of production are variable.
In the short term they will have some restricted factors of production, making supply relatively inelastic. In the long term, all factors of production are variable, and they can increase production so the curve will be more elastic. The more time a supplier has to make a change, the more elastic the curve will be.
Stock - more elastic with high stocks since if the price rises they are more capable of selling more goods.
Working below full capacity - elastic if this is happening since if the price increases they can easily increase production by going to their full capacity.
Ease of entry to the market - more elastic if it is easy. Large start up costs can make it inelastic.