3.4 Price Elasticity Of Supply Flashcards
What is the price elasticity of supply?
Measures the extend of which the supply of a good changes with a change of price
What is the formula for PES?
%change in quantity supplied/%change in price
How do you know if the curve is elastic?
-supply curve intersects price axis (though elasticity falls from point to point)
How do you know if the supply curve is inelastic?
If the supply curve cuts the X axis (quantity)
(Although elasticity rises as you go up the curve)
How do you know If the elasticity of the supply curve is unity(PES of 1)
If the supply curve goes through the origin (0,0)
What 6 factor determine the PES?
-length of the production period
-availability of spruce capacity
-ease of switching between alternative methods of production
-number of firms in the market and the ease of entering the market
-the ease of accumulating stocks
-time
How does the length of production period determine the PES?
-if firms can convert raw materials to finished goods quickly supply will be more elastic
How does the availability of space capacity affect the PES?
Production can be increased in the short run if there is labour and raw materials readily available
How does the ease of accumulating stocks affect the PES?
-when stocks are at low cost firms can react quickly to an increase in demand
-alternatively firms can respond to a price fall by diverting current attention from sales into stocks accumulation
(Ease with which stocks of raw materials or components can be brought from outside suppliers and then stored has a similar effect)
How does the number of firms in the market and the ease of entering the market effect the PES?
-the more firms in the market, the easier it is to leave and enter and the greater the elasticity
How does the ease of switching between alternative methods of production affect the PES?
When firms can quickly alter the way they produce goods (elf switching between the use of labour and capital) supply tends to be more elastic
-if firms produce a range of products and can switch raw materials, labour or machines from one production to the other , the supply of any one product tends to be elastic
What is market period supply?
Curve s1 and shown by a vertical line -depicts situations for firms when there is an unexpected shift in demand and output cannot be immediately increased
-supply is completely inelastic and price rises to eliminate the excess demand brought by the shift in the demand curve
What is short-run supply?
-higher price means high profit-creates an incentive
-firms increase output in the short-run by hiring more variable factors of production (e.g labour)
-increase in output is shown by movement up the supply curve
-in the Short run-supply increases and the price falls
(More elastic than market Period supply curve)
What is long-run supply?
Increase scale of production by employing more capital and other factors of production that are fixed in the short run, but variable in the long run(if they think the increase in demand will be long-lasting)
Output rise and price falls again
Is short run supply more or less elastic?
Less elastic
elastic supply diagram
inelastic suppy diagram
unit elasticity of supply diagram
(not curved unlike unit elasticty of demand)
perfectly elastic supply diagram
perfectly inelastic supply?
