2.8 PES

Question 1

What is PES

Answer 1

Responsiveness of quantity supplied to a change in price

Question 2

PES formula

Answer 2

% change of quantity supplied / % change of price

Question 3

Determinants of PES

Answer 3

Time period required to adjust the scale of production
Spare production capabilities and capacity
Mobility of factor of production
The availability of spare stock.

SPF ST

Question 4

What is Time period required to adjust the scale of production (determinant)

Answer 4

How long it takes to increase output or decrease output of goods/services affects PES.

Less elastic if time period is longer.

Question 5

What is Spare production capabilities and capacity

Answer 5

Firms can increase output relatively quickly if they have spare capacity or production capabilities

More spare capability = higher PES

Question 6

What is availability of spare stock

Answer 6

Firms can increase the output of goods if they have more in reserve incase there is a sudden increase in demand

More stock = higher PES and more elastic.

Question 7

What is mobility and availability of factors of production

Answer 7

More mobile the factors of production are, the easier it would be to reallocate resources and increase output of the particular good.

More mobile = more elastic

Question 8

Why is PES important

Answer 8

Firms want a high PES so that they can capatalize on sudden increases on demand and increase output so that they don’t miss out on profits.

increased demand = more customers = higher prices = more profit

Question 9

How can a firm increase PES

Answer 9

Increase storage to keep stock of its products
investing in additional and spare productive capacity
Employing latest production equipment and processes
Training workers in new skills so that they are more occupationally mobile

Question 10

What happens if PES is low (inelastic)

Answer 10

The longer it takes to increase the supply of a product in response to an increase in demand, the lower the impact will be on sales and the greater impact will be on its market price. Shortage of supply = increased market price.

OR

Businesses won’t be able to cut production down temporarily if demand is down. This would lead to a surplus of supply which would lead to reduced prices and reduced profits.