1.2.5: Elasticity of Supply

Question 1

What is price elasticity of supply?

Answer 1

• The responsiveness of supply to a change in price of the good

Question 2

What is the formula for PES?

Answer 2

• % change in quantity supplied/ % change in price

Question 3

When is PES unitary elastic?

Answer 3

• When PES=1
• When quantity supplied changes by exactly the same percentage as price

Question 4

When is PES relatively elastic?

Answer 4

• When PES>1
• Here, quantity supplied changes by a larger percentage than price so supply is relatively responsive to price

Question 5

When is PES relatively inelastic?

Answer 5

• When PES<1
• Quantity supplied changes by a smaller percentage than price so supply is relatively unresponsive to price

Question 6

When is PES perfectly elastic?

Answer 6

• When PES= infinity
• Here, a change in prices means that quantity supplied falls to 0 and supply is very responsive to price
• Shown by a horizontal line

Question 7

When is PES perfectly inelastic?

Answer 7

• Where PES=0
• A change in price has no effect on output so demand is completely unresponsive to price
• Shown with vertical line

Question 8

What are the factors that affect PES?

Answer 8

• Time
• Stocks
• Working below full capacity
• Availability of factors of production
• Ease of entry into the market
• Availability of substitutes