1.2.5 Price Elasticity of Supply

Question 1

What is Price Elasticity of supply?

Answer 1

A measure of the sensitivity of supply following a change in price

Question 2

What is the formula for PES?

Answer 2

PES = %change in quantity supplied / %change in price

Question 3

Describe what good that has a +0.7 PES?

Answer 3

It is price inelastic, a 1% rise in price leads to a 0.7% rise in the quantity supplied

Question 4

Describe the good that has a +1.5 PES?

Answer 4

It is price elastic, a 1% rise in price leads to a 1.5% rise in the quantity supplied

Question 5

What factors influence PES?

Answer 5

• whether or not the firm is operating beneath full capacity
• level of stockpiles of the good
• whether the change in price in temporary or permanent

Question 6

How does the short run supply and long run supply differ?

Answer 6

To change the short run supply is often difficult, due to having to hire more skilled labour. Therefore short run supply is often inelastic
Long run therefore is elastic, because it is easier to adjust production capabilities in the long run rather than the short run

Question 7

In the context of Avocados, why is it PES inelastic?

Answer 7

• agricultural good, supply in unpredictable and takes time to adjust
• growing season, supply cannot be changed easily
• likely to perish in store, unlikely to be stocks of them

Question 8

An evaluation point of PES?

Answer 8

• elasticity is likely to change over time, from inelastic to elastic
• elasticity depends on a number of factors; willingness of producers to produce