1.2.5 Elasticity of supply

Question 1

What is PES?

Answer 1

Price elasticity of supply (PES) measures the relationship between change in quantity supplied and a change
in market price.

Question 2

What happens when supply is price elastic?

Answer 2

If supply is price elastic, producers can increase their output without a rise in cost or a time delay. If supply is
price inelastic, firms find it hard to change their production in a given time period.

Question 3

What is the formula for PES?

Answer 3

% change in quantity supplied divided by the % change in price

Question 4

Why is PES positive?

Answer 4

Price elasticity of supply will be a positive number, because the relationship between price and quantity
supplied is positive i.e. the supply curve is upwards sloping.

Question 5

Explain the values of PES

Answer 5

• When PES > +1, supply is price elastic
• When PES < 1, supply is price inelastic
• When PES = 0, supply is perfectly inelastic (the supply curve is drawn vertically)
• When PES = infinity, supply is perfectly elastic (the supply curve is drawn horizontally)

Question 6

Show perfectly elastic and inelastic supply

Answer 6

Question 7

Explain the factors that affect PES

Answer 7

• Spare production capacity: If there is plenty of spare capacity, a business can increase output without
  a rise in costs and supply will be elastic in response to a change in demand
• Stocks of finished products and components: If stocks of raw materials and finished products are at a
  high level, a firm is able to respond to a change in demand - supply will be elastic. Perishable goods
  are often harder/more expensive to store
• Ease and cost of factor substitution/factor mobility: If capital and labour are occupationally mobile,
  the elasticity of supply for a product is likely to be higher as resources can be mobilised to supply the
  extra output e.g. the reallocation of workers to new tasks. This is more likely to be the case if the skill
  level required for the job is relatively low.
• Time period and production speed: Supply is more price elastic the longer the time that a firm is
  allowed to adjust its production levels
  a. The short-run for an economist refers to the period of time in which at least one factor of
  production is fixed; in the short-run, PES will be relatively inelastic
  b. The long-run for an economist refers to the period of time in which all factors of production
  are variable; in the long-run, PES will be relatively elastic
• Complexity of the production process: if a production process is particularly complex (e.g. building
  an aircraft carrier) then supply will be relatively price inelastic; for a product with a relatively simple
  production process (e.g. pencil manufacturing) then supply is more likely to be price elastic

Question 8

What does elastic supply and inelastic supply look like?

Answer 8