4.1.3.4 price elasticity of supply Flashcards
what is PES?
price elasticity of supply is the responsiveness of a change in supply to a change in price
what’s the formula for PES?
what value is always given and why?
% change in quantity supplied / % change in price
will always have a positive value because of the direct relationship between price and quantity supplied
what happens with price elastic supply?
what’s the numerical value?
what will the supply curve be like?
if supply is elastic, firms can increase supply quickly at little cost
PES = greater than 1
the change in price has lead to a greater % change in QS
supply curve will be relatively shallow
what happens with price inelastic supply?
what’s the numerical value?
what will the supply curve be like?
if supply is inelastic, an increase in supply will be expensive for firms and take a long time
PES = less than 1
the change in price has led to a smaller % change in QS
supply curve will be relatively steep?
how do you show inelastic and elastic supply on a diagram?
what happens with unitary elastic supply?
what’s the numerical value?
what does the supply curve look like?
PES = exactly 1
the change in price has led to the same change in QS
in this case, supply curve is any straight line drawn through the origin
how do you show unitary elastic supply on a diagram?
what happens with perfectly inelastic supply?
what’s the numerical value?
what does the supply curve look like?
PES = 0
the change in price level has led to zero change in the quantity supplied
supply curve is vertical
what happens with perfectly elastic supply?
what’s the numerical value?
what does the supply curve look like?
when the supply of a product is perfectly elastic
PES = infinity
the supply curve for perfectly elastic supply is horizontal
how do you show perfectly inelastic and elastic supply on a diagram?
what are the 6 factors that affect PES?
1) time taken to expand supply
-> if it’s difficult/time consuming to increase production
2) size of spare capacity
-> firms with machinery, factory space / labour that isn’t fully utilised will be more able to expand production in the short run
-> supply will tend to be more price elastic
3) available stocks
-> firms with stocks finished/partly finished will be able to respond relatively quickly to a price increase + so supply will tend to be more price elastic
4) ease of switching production
5) how sustainable factors are
-> if labour and capital are mobile supply is more elastic
6) barriers to entry to the market
-> higher barriers = supply more price in elastic
-> difficult for firms to enter and supply the market
