2.6 Microeconomics Elasticity of Supply Flashcards
Price elasticity of supply
A measure of the responsiveness of a firm to a change in price.
PES=0
Perfectly inelastic supply, no matter what the price, the supply of the good does not change.
PES<1
The supply of the good is inelastic. This means a change in price leads to a smaller proportionate change in the amount supplied to the market.
PES=1
Unitary elasticity of supply.
PES>1
Elastic response by the firm to a change in price.
PES=infinity
A perfectly elastic response to a change in price. Either the firm supplies at that price or not at all.
Short term
At least one factor of production is fixed so supply is more inelastic in the short term.
Long term
The response of the firm is more elastic in the long term.
Why is PES more elastic in the long term?
Because the firm can change all factors of production.
What factor does a firm change in the short run?
Tends to be labour e.g. extra shift workers
How does spare capacity affect the PES?
Increases the PES as the firm can respond quickly to change in the market price.
How does spare stock influence the value of the PES?
It increases its value as the firm can sell the spare stock if the price rises. PES is more elastic.
How does a flexible labour affect the PES?
It means the workforce can adapt and so can make the PES more elastic.
Is the supply of fresh vegetables elastic or inelastic in the short run?
Inelastic as the farm would have to plant more vegetables for the following year.
But it depends on whether there is a global supply of vegetables.
