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 is unity? (unit elasticity)

Answer 2

Where PED / YED / XED is 1.

Question 3

What value shows if a supply curve is elastic?

Answer 3

If the PE_s is greater than 1.

Question 4

How can you tell if the supply curve is inelastic?

Answer 4

If the PE_s is less than 1.

Question 5

Draw a perfectly elastic graph.

Answer 5

Question 6

Draw a relatively elastic supply graph.

Answer 6

This is actually a graph displaying unity as the gradient = 1.

Imagine this graph, but with a gradient of around 2.

Question 7

Draw a relatively inelastic supply graph.

Answer 7

Question 8

Draw a perfectly inelastic graph.

Answer 8

Question 9

What are the factors determining the price elasticity of supply?

Answer 9

The length of the production period

The availability of spare capacity

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 10

Why does the length of the production period affect PE_S?

Answer 10

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 11

Why does the length of the production period affect PE_S?

Answer 11

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 12

Why does the availability of spare capacity affect PE_S?

Answer 12

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 13

Why does the ease of accumulating stocks affect PE_S?

Answer 13

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 14

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

Answer 14

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 15

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

Answer 15

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 16

Why does time affect PE_S?

Answer 16

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 17

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

Answer 17

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

Question 18

Why do weather conditions affect market supply?

Answer 18

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 19

What are the three types of supply affected by time?

Answer 19

Market period supply
Short-run supply
Long-run supply

Question 20

What is market supply?

Answer 20

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 21

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

Answer 21

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.