1.2.5 Price Elasticity of Demand

Question 1

Define PES

Answer 1

PES is the responsiveness of supply to a change in price.

Question 2

What range of values are there for PES and what does each value represent?

Answer 2

0 to 1 = inelastic
1 = Unitary elastic
1 to infinity = elastic

Question 3

What is the formula for calculating PES?

Answer 3

% change in quantity supplied / % change in price

Question 4

Name 4 factors that affect PES and explain how these factors affect elasticity

Answer 4

Availability of producer substitutes = How easily can the producer switch to producing something else? The easier it is the higher the elasticity.

Time = The longer the time period, the easier it is for a firm to switch production to another good.

Spare capacity = If a producer has spare capacity, it is easier for him to increase production quickly e.g. overtime machines running 24/7

Availability of stocks = If a product can be stored, then it is easier to respond to price changes, you can just pull products out of storage.