3.4 Price Elasticity of Supply Flashcards
What is price elasticity of supply (PES)?
PES measures the relationship between change in quantity supplied and a change in price.
What is the formula for calculating price elasticity of supply?
% change in quantity supplied / % change in price
Define elastic supply.
Producers can increase their output without a rise in cost or a time delay.
Define inelastic supply.
Firms find it hard to change their production in a given time period.
What is the PES type for elastic supply?
PES > 1
What happens to quantity supplied in perfectly elastic supply?
Quantity supplied is infinite at a given price.
What is the PES type for inelastic supply?
0 < PES < 1
What occurs in perfectly inelastic supply?
A change in price will lead to no change in quantity supplied.
How does elastic supply respond to a change in price?
Can be met without a large rise in price.
What is the characteristic of a perfectly inelastic supply curve?
Supply is fixed and cannot respond to a change in market demand.
What are factors affecting price elasticity of supply?
- Spare production capacity
- Stocks of finished products and components
- Ease and cost of factor substitution/factor mobility
- Time period and production speed
When is market supply considered price elastic?
When PES > 1 following a change in demand.
What is the difference between short run and long run in terms of production factors?
Short run: Level and quality of factors of production is fixed. Long run: Level and quality of factors of production can change.
Why might the PES of salmon be considered low?
Factors such as government restrictions, rising fish feed prices, and environmental conditions limit the expansion of supply.
Explain why the supply of manufactured goods tends to be more price elastic than the supply of agricultural goods.
- Time period: Manufacturing can adjust quickly, agriculture has fixed timelines.
- Substitutability: Factors in manufacturing are easier to substitute.
- Capacity factors: Manufacturing can expand capacity more readily.
- Stocks: Manufactured goods can be stored, agricultural goods are often perishable.