3.1.2.4 Price elasticity of supply Flashcards
What is price elasticity of supply (PES)?
PES measures the responsiveness of quantity supplied to a change in price. The formula is:
PES = % change in quantity supplied / % change in price
What does a PES > 1 indicate?
A PES > 1 indicates that supply is elastic, meaning firms can increase supply quickly and at little cost.
What does a PES < 1 indicate?
A PES < 1 indicates that supply is inelastic, meaning firms cannot easily increase supply, and it may be expensive or time-consuming.
What does a PES = 0 indicate?
A PES = 0 indicates perfectly inelastic supply, where supply is fixed and cannot be increased regardless of price changes.
What does a PES = infinity indicate?
A PES = infinity indicates perfectly elastic supply, where any quantity demanded can be supplied without changing the price.
How is PES calculated?
PES is calculated using the formula:
PES = % change in quantity supplied / % change in price
For example, if the price of wheat increases by 15% and supply decreases by 20%, PES = -20% / 15% = -1.33 (relatively inelastic).
What factors influence PES?
Factors influencing PES include:
- Time scale (long run = more elastic).
- Spare capacity (more spare capacity = more elastic).
- Level of stocks (storable goods = more elastic).
- Substitutability of factors (mobile resources = more elastic).
- Barriers to entry (higher barriers = more inelastic).
How does time scale affect PES?
In the short run, supply is more inelastic because firms cannot quickly increase production. In the long run, supply becomes more elastic as firms can adjust production levels.
How does spare capacity affect PES?
If firms have spare capacity, they can increase supply quickly, making supply more elastic. If operating at full capacity, supply is more inelastic.
How does the level of stocks affect PES?
If goods can be stored (e.g., CDs), supply is more elastic because firms can release stocks to meet demand. Perishable goods (e.g., apples) make supply more inelastic.
How does substitutability of factors affect PES?
If resources (e.g., labor, capital) are mobile, supply is more elastic because resources can be reallocated to increase production of a good.
How do barriers to entry affect PES?
Higher barriers to entry make supply more inelastic because it is difficult for new firms to enter the market and increase supply.
What is the difference between elastic and inelastic supply?
Elastic supply (PES > 1): Firms can increase supply quickly and at little cost.
Inelastic supply (PES < 1): Firms cannot easily increase supply, and it may be expensive or time-consuming.
What is an example of perfectly inelastic supply?
Perfectly inelastic supply (PES = 0) occurs when supply is fixed and cannot be increased, regardless of price changes (e.g., tickets to a sold-out event).
What is an example of perfectly elastic supply?
Perfectly elastic supply (PES = infinity) occurs when any quantity demanded can be supplied without changing the price (e.g., in perfectly competitive markets).
How does PES affect firms’ ability to respond to price changes?
Firms with elastic supply can respond quickly to price changes by increasing or decreasing production. Firms with inelastic supply struggle to adjust production levels.
Why is PES important for policymakers?
Policymakers use PES to predict how changes in price (e.g., due to taxes or subsidies) will affect supply and market equilibrium.
How does PES influence market stability?
Markets with elastic supply are more stable because supply can adjust quickly to changes in demand. Markets with inelastic supply are less stable and more prone to price fluctuations.
