3.4 Price Elasticity Of Supply

Question 1

What is price elasticity of supply?

Answer 1

• The price elasticity of supply is the responsiveness of a change in supply to a change in price.
• The formula for this is: %∆Qs/ %∆P

Question 2

What is the impact of supply being elastic to firms?

Answer 2

• If supply is elastic, firms can increase supply quickly at little cost.
• The numerical value for PES is >1

Question 3

What is the impact of supply being inelastic?

Answer 3

• If supply is inelastic, an increase in supply will be expensive for firms and take a long time.
• PES is <1.

Question 4

What happens when supply is fixed?

Answer 4

• supply has PES = 0.
• Supply is fixed, so if there is a change in demand, it cannot be met easily.

Question 5

When is supply perfectly elastic?

Answer 5

• Supply is perfectly elastic when PES = infinity.
• Any quantity demanded can be met without changing price.

Question 6

What factors influence PES?

Answer 6

• time scale
• spare capacity
• level of stocks
• how substitutable factors are
• barriers to entry to the market

Question 7

Factors influencing PES-time scale

Answer 7

• In the short run, supply is more price inelastic, because producers cannot quickly increase supply.
• In the long run, supply becomes more price elastic.

Question 8

Factors influencing PES-spare capacity

Answer 8

• If the firm is operating at full capacity, there is no space left to increase supply.
• If there are spare resources, for example in a recession there are lots of spare and unemployed resources, supply can be increased quickly.

Question 9

Factors influencing PES-level of stocks

Answer 9

• If goods can be stored, such as CDs, firms can stock them and increase market supply easily.
• If the goods are perishable, such as apples, firms cannot stock them for long so supply is more inelastic.

Question 10

Factors influencing PES-How substitutable factors are

Answer 10

• If labour and capital are mobile, supply is more price elastic because resources can be allocated to where extra supply is needed.
• For example, if workers have transferable skills, they can be reallocated to produce a different good and increase the supply of it.

Question 11

Factors influencing PES-Barriers to entry to the market

Answer 11

• Higher barriers to entry means supply is more price inelastic, because it is difficult for new firms to enter and supply the market.