1.2.5 - elasticity of supply

Question 1

What does price elasticity of supply (PES) measure?

Answer 1

PES measures the responsiveness of the quantity supplied of a good or service to changes in price.

Question 2

Why is PES crucial?

Answer 2

PES is crucial for understanding how suppliers react to price changes in the market and how quickly they can adjust their production levels.

Question 3

What is the formula for calculating PES?

Answer 3

PES = (%∆QS)/(%∆P), where %∆ = (difference/original) * 100.

Question 4

Why is PES always positive?

Answer 4

PES is positive because quantity supplied is positively related to price.

Question 5

What is the range of PES values?

Answer 5

PES values range from 0 to +∞, with a mid-value of +1.

Question 6

What is the effect of barriers to entry on PES?

Answer 6

Barriers to entry can restrict the responsiveness of supply to price changes.

Question 7

How does the availability of raw materials affect PES?

Answer 7

If raw materials are not easily accessible, it can cause a production lag, delaying the supplier’s response to price changes.

Question 8

What is the role of inventory (stock levels) in PES?

Answer 8

Stock levels can affect how quickly a supplier can respond to price changes.

Question 9

What is the short-term in terms of PES?

Answer 9

The short-term is the period when at least one factor of production is fixed, limiting the ability to increase supply.

Question 10

What is the long-term in terms of PES?

Answer 10

The long-term is when all factors of production are variable, allowing for an increase in supply.

Question 11

What does ‘working below full capacity’ mean for PES?

Answer 11

It means a supplier is not producing as many goods as they can with available resources, but they could increase production if needed.

Question 12

How do factors of production affect PES?

Answer 12

The availability, mobility, and substitutability of factors of production (labor, capital, land and enterprise) determine how quickly resources can be mobilized to increase output.

Question 13

What happens if factors of production are not accessible?

Answer 13

If not accessible, it can cause a production lag as it takes time to produce a product.

Question 14

How does perishability of goods affect PES?

Answer 14

Perishable goods are hard and expensive to store, which makes it difficult for suppliers to respond to price changes.

Question 15

What is elastic supply?

Answer 15

Elastic supply is when the quantity supplied is very responsive to price changes.

Question 16

What is the PES value for elastic supply?

Answer 16

The % change in QS is greater than the % change in P; value lies between +1 and +∞.

Question 17

What is the significance of a straight line supply curve starting at the origin?

Answer 17

A straight line supply curve starting at the origin has PES = +1, indicating a proportional relationship between price and quantity supplied.

Question 18

What is perfectly elastic supply?

Answer 18

PES = +∞, meaning a small price change will cause the quantity supplied to fall to zero, a change can in demand can be met without any changes in price

Question 19

What is inelastic supply?

Answer 19

Inelastic supply is when quantity supplied is not very responsive to price changes.

Question 20

What is the PES value for inelastic supply?

Answer 20

The % change in QS is less than the % change in P; value lies between 0 and +1.

Question 21

What is perfectly inelastic supply?

Answer 21

PES = 0, meaning a change in price has no effect on the quantity supplied, supply is fixed

Question 22

What is unit or unitary supply?

Answer 22

PES = +1, meaning the % change in QS is the same as the % change in P.