1.2.5 Elasticity of supply

Question 1

Define PES

Answer 1

Price elasticity of supply is the relationship between price and supply and how responsive supply is to a change in price.

Question 2

How is PES calculated

Answer 2

% change in supply / % change in price

Question 3

Explain the PES numerical values

Answer 3

PES > 1 = elastic supply
PES < 1 = inelastic supply

Question 4

Explain 2 factors which affect PES

Answer 4

1) Spare production capacity within a firm means a firm can increase their output without having to increase their costs influencing PES to become elastic.
2) Time also influences a firms PES as in the short run firms are more likley to have PES inelastic as their factors of production are fixed meaning prices will change with a greater proportion compared to supply. However in the long run when firms have increased flexibility and factors of production aren’t fixed it means they can respond to changes in demand through supply rather than price making PES elastic.

short run FoP = fixed so supply cant change easily. Long run FoP = flexible so supply can change easily

Question 5

Factors which affect supply

Answer 5

• change in cost of production
• technology
• indirect taxes
• subsidies
• external shocks