3.3.4 - Price Elasticity of Supply

Question 1

What is the price elasticity of supply?

Answer 1

Measures the extent to which the supply of a good changes in response to a change in the price of that good.

Question 2

What happens if the supply curve intersects the price axis?

Answer 2

The curve is elastic at all points, though elasticity falls towards unity as you move upwards through the curve.

Question 3

What is unity? (unit elasticity)

Answer 3

Where PED / YED / XED is 1.

Question 4

What happens if the supply curve intersects the quantity axis?

Answer 4

The curve is inelastic at all points, although elasticity rises as you move up the curve.

Question 5

What value shows if a demand curve is elastic?

Answer 5

If the PE_s is greater than 1.

Question 6

How can you tell if the demand curve is inelastic?

Answer 6

If the PE_s is less than 1.

Question 7

Draw a perfectly elastic graph.

Answer 7

Question 8

Draw a relatively elastic supply graph.

Answer 8

Question 9

Draw a relatively inelastic supply graph.

Answer 9

Question 10

Draw a perfectly inelastic graph.

Answer 10

Question 11

What are the factors determining the price elasticity of supply?

Answer 11

The length of the production period

The availability of spare supply

The ease of accumulating stocks

The ease of switching between alternative methods of production

The number of firms in the market and the ease of entering the market

Time

Ease of access to specialist equipment

Weather conditions

Question 12

Why does the length of the production period affect supply?

Answer 12

If goods can be produced in a small period of time, goods will be more elastic as the firm can react to changes in the market faster.

Question 13

Why does the length of the production period affect supply?

Answer 13

If goods can be produced in a small period of time, goods will be more elastic as the firm can react to changes in the market faster.

Question 14

Why does the availability of spare capacity affect supply?

Answer 14

In the short run, if a firm possesses spare capacity, labour and raw materials are readily available, production can be quickly increased particularly in the short term.

Question 15

Why does the ease of accumulating stocks affect supply?

Answer 15

When stocks are held for long periods of time and at low cost, the firm can sell a lot of goods in times of increased demand.

Inversely, if the price of a good falls and there is not much stock held, the firm can divert production away from sales and towards stock accumulation.

Question 16

Why does the ease of switching between alternative methods of production affect supply?

Answer 16

When firms can quickly alter the way they produce goods, supply tends to be more elastic as there is an increased availability to switch to more efficient methods of production in the short term.

Question 17

Why does the number of firms in the market and the ease of entering the market affect supply?

Answer 17

The higher the number of firms in a market, along with an increased ease of leaving or entering allows supply to become more elastic.

Question 18

Why does time affect supply?

Answer 18

Demand is more elastic in the long-term than it is in the short term as consumers and firms are often tied into existing supply levels and demand in the short term.

Question 19

Why does ease of access to specialist equipment affect market supply?

Answer 19

In markets with more specialist equipment, market supply will be higher as the costs of production will be lower due to technological progress.

Question 20

Why do weather conditions affect market supply?

Answer 20

In markets reliant on weather for supply, droughts will cause the market supply to fall.

Periods of good weather will cause the market supply to increase.

Question 21

What are the three types of supply affected by time?

Answer 21

Market period supply
Short-run supply
Long-run supply

Question 22

What is market supply?

Answer 22

Market supply is the total amount of an item producers are willing and able to sell at different prices, over a given period of time.

Question 23

What is the difference between perfectly elastic demand and perfectly elastic supply?

Answer 23

For a perfectly elastic demand graph, demand is infinitely elastic at all price on or below the demand curve, though if price rises above the demand curve, the demand immediately falls to zero.

For a perfectly elastic supply graph, supply is perfectly elastic at all prices above the supply curve, but if price falls below the curve, the amount supplied immediately drops to zero as the supply curve is the lowest price that firms are willing to accept.