1.2.5 Elasticity of supply

Question 1

Price elasticity of supply (PES)

Answer 1

The responsiveness of supply to a change in price of the good/service

Question 2

Formula

Answer 2

PES = %change in quantity supplied/ %change in price

Question 3

Relatively Elastic PES

Answer 3

PES = >1

->Quantity supplied changes by a larger percentage following a change in price - supply is relatively responsive to a change in price.

Question 4

Relatively inelastic PES

Answer 4

PES = <1

-> Quantity supplied changes by a smaller percentage following a change in price - supply is relatively unresponsive to a change in price

Question 5

Perfectly elastic PES

Answer 5

PES = infinity

-> A change in price means that quantity supplied falls to 0 - supply is very responsive to price.

Question 6

Perfectly inelastic PES

Answer 6

PES = 0

-> A change in price has no effect on the quantity supplied - supply is completely unresponsive to price.

Question 7

Unitary elastic PES

Answer 7

PES = 1

-> Quantity supplied changes by exactly the same percentage as price.

Question 8

Factors influencing PES - Time

Answer 8

-> In the short term, supply is relatively price inelastic. As in the short term at least one factor of production is fixed, so firms cannot increase production.

-> Whereas, in the long term supply is relatively price elastic. As in the long term all factors of production are variable, so producers can increase production.

Question 9

Factors influencing PES - Stock

Answer 9

If a firm has a large stockpile of goods (e.g. CDs), this means supply is relatively price elastic. As firms can easily increase supply.

Question 10

Factors influencing PES - Spare capacity

Answer 10

Firms operating at full capacity, are relatively inelastic, as there is no room to increase supply. Whereas, firms working below full capacity are relatively elastic. When there is an increase in the price, firms can easily respond by using up spare resources to increase supply.

Question 11

Factors influencing PES - Ease of entry in the market

Answer 11

Higher barriers of entry, (e.g. high costs of start up equipment) means supply is more price inelastic. As it makes it harder for firms to increase supply.

Question 12

Factors influencing PES - Availability of substitutes

Answer 12

Goods with many substitute are relatively price elastic i.e. chocolate bars. If the price of a ‘Twix’ increases, ‘nestle’ will direct more factors of production away from ‘Milky Ways’ etc. to ‘Twix’s’.