3.1.2.4 Price elasticity of supply Flashcards

1
Q

What is price elasticity of supply (PES)?

A

PES measures the responsiveness of quantity supplied to a change in price. The formula is:

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

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2
Q

What does a PES > 1 indicate?

A

A PES > 1 indicates that supply is elastic, meaning firms can increase supply quickly and at little cost.

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3
Q

What does a PES < 1 indicate?

A

A PES < 1 indicates that supply is inelastic, meaning firms cannot easily increase supply, and it may be expensive or time-consuming.

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4
Q

What does a PES = 0 indicate?

A

A PES = 0 indicates perfectly inelastic supply, where supply is fixed and cannot be increased regardless of price changes.

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5
Q

What does a PES = infinity indicate?

A

A PES = infinity indicates perfectly elastic supply, where any quantity demanded can be supplied without changing the price.

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6
Q

How is PES calculated?

A

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).

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7
Q

What factors influence PES?

A

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).
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8
Q

How does time scale affect PES?

A

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.

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9
Q

How does spare capacity affect PES?

A

If firms have spare capacity, they can increase supply quickly, making supply more elastic. If operating at full capacity, supply is more inelastic.

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10
Q

How does the level of stocks affect PES?

A

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.

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11
Q

How does substitutability of factors affect PES?

A

If resources (e.g., labor, capital) are mobile, supply is more elastic because resources can be reallocated to increase production of a good.

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12
Q

How do barriers to entry affect PES?

A

Higher barriers to entry make supply more inelastic because it is difficult for new firms to enter the market and increase supply.

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13
Q

What is the difference between elastic and inelastic supply?

A

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.

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14
Q

What is an example of perfectly inelastic supply?

A

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).

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15
Q

What is an example of perfectly elastic supply?

A

Perfectly elastic supply (PES = infinity) occurs when any quantity demanded can be supplied without changing the price (e.g., in perfectly competitive markets).

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16
Q

How does PES affect firms’ ability to respond to price changes?

A

Firms with elastic supply can respond quickly to price changes by increasing or decreasing production. Firms with inelastic supply struggle to adjust production levels.

17
Q

Why is PES important for policymakers?

A

Policymakers use PES to predict how changes in price (e.g., due to taxes or subsidies) will affect supply and market equilibrium.

18
Q

How does PES influence market stability?

A

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.