1.2.5 Elasticity of supply Flashcards
What is the elasticity of supply?
Price elasticity of supply (PES) reveals how responsive the change in quantity supplied is to a change in price.
How can PES be calculated?
% change in price
How to calculated a % change?
new value - old value
——————————- x 100
old value
What does the PES value of 0 mean?
Perfectly inelastic. The QS is completely unresponsive to the change in price. For example a fixed number of seats in a theatre.
What does the PES value of 0-1 mean?
The percentage change in QS is less than proportional to the percentage change in P. Such as agricultural products.
What does the PES value of 1-∞ mean?
Relatively elastic. The percentage change in QS is more than proportional to the percentage change in P. For example t-shirts.
What does the PES value of ∞ mean?
Perfectly elastic. The percentage change in QS will fall to zero with any percentage change in P. This is a very theoretical scenario.
What are the factors that influence PES?
/Mobility of factors of production
/Availability of raw materials
/Ability to store goods
/Spare capacity
/Time period
Explain the factor mobility of factors of production?
Mobility of the factors of production: if producers can quickly switch their resources between products, then the PES will be more elastic. For example, if prices of hiking boots increase and shoe manufacturers can switch resources from producing trainers to boots, then boots will be price elastic in supply.
Explain the factors availability of raw materials?
Availability of raw materials: if raw materials are scarce then PES will be low (inelastic). If they are abundant, PES will be higher (elastic).
Explain the factor ability to store goods?
Ability to store goods: if products can be easily stored then PES will be higher (elastic) as producers can quickly increase supply (for example, tinned food products). An inability to store products results in lower PES (inelastic).
Explain the factor spare capacity?
Spare capacity: if prices increase for a product and there is capacity to produce more in the factories that make those products, then supply will be elastic. If there is no spare capacity to increase production, then supply will be inelastic.
Explain the factor time period?
Time period: In the short run, producers may find it harder to respond to an increase in prices as it takes time to produce the product (e.g., avocados). However, in the long run they can change any of their factors of production so as to produce more.
What 4 factors are need to produce any good or service.
/Land: non man made resources used in production (e.g. coal)
/Capital: man made resources used in production (e.g. MRI machine or fertiliser)
/Labour: people involved in the production process
/Entrepreneurship: the individual(s) involved in organising the other factors of production
What is short-run?
Short-run is any period of time in which at least one factor of production is fixed and this is a limiting factor. For example, Lego may be able to vary all factors of production in the short-run, except for the number of factories (capital) that they have.
