1.2.5 - Elasticity of supply Flashcards
What is the calculation for PES?
PES = %change in quantity supplied/ % change in price
What is the definition of PES?
PES measures how responsive quantity supplied is to changes in price how much does supply change when we change the price.
What are the rules for PES?
= 0 = Perfectly inelastic (price doesn’t affect supply)
>1 = Price elastic
=1 = Unitary elastic
<1 = Price inelastic
The higher the number the more price elastic the supply is. The answer will always be +positive this represents the positive relationship between price and supply if prices rises then supply rises.
How are the Law of supply rules applied to PES?
Price rises QD rises
Price falls QS falls
Quantity supplied changes by more so price elastic if value is greater than 1
Quantity supplied changes by less than price so it is price inelastic value less than 1
What affects Price elasticity of supply?
Availability of producer substitutes - These are goods that a producer can switch for alternatives, many substitutes = High elasticity, Few = Inelastic
Complexity factors - The more barriers and complex it is to make the product e.g housing the more inelastic supply will be.
Capacity level - Higher capacity means inelastic supply, Lower capacity means elastic supply.
Time based factors - Some items take a long time to make. The longer it takes to make the product more in-elastic supply will be. The shorter it takes the more elastic. Some products are relatively cheap to hold stocks to supply the market until they are demanded. With others its impossible to hold stocks. This keeps elasticity high. If its hard/impossible to hold stock e.g. electricity then PES is inelastic.
What do Elastic and Inelastic supply curves look like?
What do perfectly elastic and perfectly inelastic supply curves look like?
What are the uses of PES?
Firms want to be able to respond quickly to changes in price and demand.
To do so they need to make their supply elastic (responsive to price changes) as possible.
Then will take measures to improve the elasticity of their supply e.g train flexible staff update tech increase capacity.
What are the limitations of PES?
Values are based on estimates.
Information used to calculate PES may become outdated.
Other factors may shift the supply curve cancelling the QS affect.
PES ignores any cost data.
The elasticity is likely to change over time so the calculation is only useful in the short term.
