1.2.5 Price Elasticity Of Supply

Question 1

Define PES

Answer 1

Price elasticity of supply measures the responsiveness of quantity supplied to a change in price of a product

Question 2

What is the formula for PES

Answer 2

%change in quantity supplied/%change in price

Question 3

Define inelastic PES

Answer 3

When the percentage change in quantity supplied is less than the percentage change in price

Question 4

Define elastic PES

Answer 4

When the percentage change in quantity supplied is greater than the percentage change in price

Question 5

What are the PES values

Answer 5

0 perfectly inelastic
0-1 inelastic
1 unitary elastic
1- infinity elastic
Infinity perfectly elastic

Question 6

When will supply be price elastic

Answer 6

If a business can respond to changing demand quickly and efficiently

Question 7

When will supply be price inelastic

Answer 7

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

Question 8

What is perfectly inelastic

Answer 8

Quantity supplied is entirely unresponsive to a change in price

Question 9

What is perfectly elastic

Answer 9

Quantity supplied is infinite at one price but falls to zero if price changes

Question 10

What are the determinants of PES

Answer 10

Production lag
Spare capacity
Stock levels and work in progress
Substitutability of factors of production
Time period

Question 11

How does production lag affect PES

Answer 11

If the product takes a long time to manufacture eg farming then they will be unresponsive to a change in price

Question 12

How does spare capacity affect PES

Answer 12

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

Question 13

How do stock levels affect PES

Answer 13

If a firm has low stock levels then it will not be able to respond to a change in price

Question 14

How does substitutability of factors of production affect PES

Answer 14

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

Question 15

How does time period affect PES

Answer 15

In the short run, firms are unable to change production processes quickly

Question 16

Supply will tend to be price elastic when…

Answer 16

• 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

Question 17

Supply will tend to be price inelastic when…

Answer 17

• 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

Question 18

What are the limitations of PES

Answer 18

• 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