3.3 Price Elasticity of Supply (PES)

Question 1

What is the law of supply

Answer 1

-as price increases, quantity supplied increases
-as price decreases quantity supplied decreases
*ceteris paribus

Question 2

What does PES stand for

Answer 2

price elasticity of supply

Question 3

What does PES measure

Answer 3

a measure of the responsiveness of the quantity supplied of a good to a change in price

Question 4

What is the formula for PES

Answer 4

PES = % change in QS/ % change in price

Question 5

What does price inelastic supply mean

Answer 5

PES < 1

• quantity supplied is relatively unresponsive to changes in price
• the percentage change in quantity is smaller than the percentage change in price

Question 6

What does price elastic supply mean

Answer 6

PES > 1

• quantity supplied is highly responsive to changes in price
• percentage change in quantity supplied is greater than the percentage change in price

Question 7

What does unit elastic of supply mean

Answer 7

PES = 1

• percentage change in quantity supplied is equal to the percentage change in price

Question 8

what does perfectly inelastic supply mean

Answer 8

PES = 0

-quantity supplied is unresponsive to price changes

Question 9

what does perfectly elastic supply mean

Answer 9

PES = infinity

• change in price results in an infinitely large response in quantity supplied

Question 10

what does the steepness of a curve that intersects tell us

Answer 10

steeper = inelastic
flatter = elastic

Question 11

What are the determinants of PES

Answer 11

ACRONYM = LMARS

length of time
mobility of factors of production
ability to stock stores
rate at which costs increase
spare (unused) capacity of firms

Question 12

Describe length of time as a determinant

Answer 12

short-run - PES < 1 (inelastic)

• quantity supplied is not very responsive to price changes
• businesses may be unable to increase or decrease any of its inputs to change the quantity supplied in response to changes in price

long-run - PES > 1 (elastic)

• quantity supplied is more responsive to price changes
• firms are able to better respond to price changes over a long period as they have time to adjust their inputs

Question 13

What are mobility of factors of production

Answer 13

mobility of factors = how easily and quickly resources can be transferred from one production function to another

Question 14

Describe mobility of factors of production

Answer 14

easily switch resources - PES > 1 (elastic)

• if resources can be transferred easily from one line of production to another, the responsiveness of quantity supplied to a change in price will be greater
  -e.g. strawberry cultivation to corn cultivation

not easily switch resources - PES < 1 (inelastic)

• if resources can’t be transferred easily from one line of production to another, the responsiveness of quantity supplied to a change in price will be low
• e.g. corn cultivation to car production

Question 15

Describe spare (unused) capacity of firms

Answer 15

spare capacity (land, labour, capital) - PES > 1 (elastic)

• relatively easy for a firm to increase quantity supply as price increases

no spare capacity - PES < 1 (inelastic)

• not easy for a firm to respond to a price rise

Question 16

Describe ability to store stocks

Answer 16

able to store stocks of output - PES > 1 (elastic)

• firms can increase quantity supplied when price rises more easily

not able to store stocks - PES < 1 (inelastic)

• firms can’t increase quantity supplied as easily

Question 17

Describe the rate at which costs increase

Answer 17

costs of producing extra output increases rapidly = PES < 1 (inelastic)

• firms find it difficult to expand output in response to an increase in supply as they don’t want to incur large costs
• e.g. fertiliser is expensive

costs of producing extra output increases slowly = PES > 1 (elastic)

• easy to expand output

Question 18

Why do primary commodities have a lower PES compared to manufactured products

Answer 18

in the short time, agricultural products usually have a fixed supply and time is needed for quantity supplied to respond to price changes:
- price inelastic supply

1. length of time
   - unable to increase or decrease any of its inputs to change the quantity produced e.g. land and labour
   - need at least a whole planting season to respond to higher prices
   - less land due to environmental degredation
   - requires more technological advancement and other inputs which take time
2. rate at which costs increase
   - need to make investments to begin production
   - requires technological advancements
   - agricultural resources may be expensive (fertiliser)
3. ability to stock stores
   - unable to stock as it will go off
4. mobility of factors of production
   - long time to shift resources out of agriculture