1.2.5 Price Elasticity Of Supply Flashcards
Define PES
Price elasticity of supply measures the responsiveness of quantity supplied to a change in price of a product
What is the formula for PES
%change in quantity supplied/%change in price
Define inelastic PES
When the percentage change in quantity supplied is less than the percentage change in price
Define elastic PES
When the percentage change in quantity supplied is greater than the percentage change in price
What are the PES values
0 perfectly inelastic
0-1 inelastic
1 unitary elastic
1- infinity elastic
Infinity perfectly elastic
When will supply be price elastic
If a business can respond to changing demand quickly and efficiently
When will supply be price inelastic
If the business struggles to change output, even when high prices give scope for huge profits, as they can’t easily and quickly find the extra staff to produce more goods
What is perfectly inelastic
Quantity supplied is entirely unresponsive to a change in price
What is perfectly elastic
Quantity supplied is infinite at one price but falls to zero if price changes
What are the determinants of PES
Production lag
Spare capacity
Stock levels and work in progress
Substitutability of factors of production
Time period
How does production lag affect PES
If the product takes a long time to manufacture eg farming then they will be unresponsive to a change in price
How does spare capacity affect PES
If a firm is underutilising its resources then they are below full capacity. If price increases then the firm can increase capacity therefore increase supply
How do stock levels affect PES
If a firm has low stock levels then it will not be able to respond to a change in price
How does substitutability of factors of production affect PES
If a firm can easily move the factors of production between product lines then it will be able to respond to a change in price
How does time period affect PES
In the short run, firms are unable to change production processes quickly
Supply will tend to be price elastic when…
- supplier has plenty of spare capacity to increase output
- high stock levels are immediately available to meet rising demand
- there is a short production time frame to get extra products to market
- ease of factor substitution is high
Supply will tend to be price inelastic when…
- supplier has limited spare capacity in the short term
- stock levels are low or can only be increased with a time lag
- there is a time delay between starting and finishing the production process
- factors of production are immobile and cannot easily be switched between tasks
What are the limitations of PES
- PES figures are often estimates based on a sample of firms and may not be reliable
- PES figured may change over time eg new competitors enter market, increasing capacity and elasticity
- Ceteris paribus may not hold
