1.2.5 - elasticity of supply Flashcards
How do you calculate PES?
% change in quantity supplied / % change in price
Why is PES always positive?
Due to the law of supply - positive relationship between price and quantity supplied
What is PES?
The responsiveness of quantity supplied to a change in price, ceteris paribus.
What does a perfectly elastic graph look like?
A horizontal line from the y axis
What does an elastic graph look like?
An upwards sloping curve from the y axis
What does a perfectly inelastic graph look like?
A vertical line from the x axis
What does an inelastic graph look like?
An upwards sloping curve from the x axis
What does a unit elastic graph look like?
An upwards sloping curve from the origin
What are the factors that determine PES?
SPLAT:
Spare capacity
Production lags/length of productive process
Level of stocks
Availability of FOPs
Time
How does Spare capacity affect PES?
The greater the spare capacity the more responsive the PES, therefore more elastic. This is because the firm is able to increase production in response to a price increase.
How do production lags/length of production process affect the PES?
The longer and more complex the productive process the more inelastic the PES. eg. agricultural products have considerable time lags so are inelastic.
How does level of stock affect the PES?
If a firm has a high level of stock, PES is elastic because it can quickly release units into the market as the price rises. Low stock levels make the PES inelastic because they can’t respond quickly to the price change.
How does availability of FOPs affect the PES?
Shortages and disruption to supply of raw materials will inhibit the capacity to produce, making PES inelastic. Strikes and shortages of labour units also make PES inelastic.
How does time affect the PES?
In the long run supply will be elastic because firms have opportunity to produce more units and find solutions to problems disrupting production. In the short run supply is very inelastic.
