3.4 - PES Flashcards
what is the price elasticity of supply?
measures the extent to which the supply of a good changes in response to a change in the price of that good
What is the formula for PES?
PES = % change Qs / % change price
What are the factors affecting the price elasticity of supply?
- length of the production period
- availability of space capacity
- ease of accumulating stocks
- ease of switching between alternative methods of production
- number of firms in the market and the ease of entering the market
How does time affect the pes?
supply is more elastic in the long run because it takes time to respond to the change in price
How does market period supply affect the PES?
if a firm is surprised by the sudden increase in demand (from D -> D1), firms cannot immediately increase output. in the market period, supply is completely inelastic.
How does short run supply (time) affect PES?
higher prices = higher profits can be made, incentive firm to increase production. short run supply curve is more elastic than the market one
how does long run supply (time) affect PES?
if firms think demand will increase in the long run, they may increase production by increasing CAPITAL. this is the most elastic one.
what PES is inelastic supply?
when PES < 1
When is PES elastic?
when PES > 1
when is PES unitary elastic?
PES = 1
When is PES perfectly inelastic?
PES = 0
when is pes perfectly elastic?
when it equals infinity
what is the cause for perfectly elastic demand?
when something is a perfect substitute available. if the price changes, then the consumers won’t buy it - they will simply buy the other product
What is the cause for perfectly elastic supply?
where p1 is the only acceptable price for firms to be able to produce within a market
