5. Elasticity of Supply PES Flashcards
what is price elasticity of supply
measure of how much the supply of a product changes when there is a change in price
PES (calculation)
%changeinQs/%changein P
if PES= 0 then..
a change in P will have no effect on Qs - perfectly inelastic supply
- P1, p2, p3 = Q
when might we see a perfectly inelastic supply curve (think time)
in the very short run - immediate time period
- impossible for firms to increase supply straight away until new FOPs are employed
if PES=∞..
perfectly elastic supply - any change in P will result in infinite amount of chang in Q
1>PES>0 means a product has…
inelastic supply - a change in P –> a less than proportionate change in Qs
∞>PES>1 means a product has…
elastic supply - a change in P –> greater than proportionate change in Qs
PES=1 means a product…
has unit elastic supply - a change in P –> proportionate change in Qs
determinants of PES
CAT
Costs of production
Ability to store stock
Time period considered
C as a PES determinant: if total costs rise SIGNIFICANTLY as a producer ATTEMPTS to increase supply, then it is likely that the producer __________ the supply, so the ES of the producer will be __________
- will not raise
- relatively inelastic
BECAUSE - it takes large price rises to make increasing supply profitable
C as a PES determinant: if total costs dont rise SIGNIFICANTLY the producer will _______Qs and take advantage of ________ increase in costs to benefit from higher prices
- raise
- low
to make more profits
C as a PES determinants: name the factors that assist in preventing a significant rise in costs
ME
Mobility of FOPs
Existence of unused capacity
M: mobility of factors of production
If FOPs are easily moved from one productive use to another PES will be….
relatively elastic when it is easy to shift production
eg. if price of 2L bottles rise then the extra cost of switching from producing 1L bottles will not be great
unused capacity
productive resources that are not being fully used
E: if a firm has lots of unused capacity, it will be able to _____output easily and without great costs _______
- increase
- increases
therefore PES is relatively high
E: if a firm is producing at capacity then it is ______ to increase S without an increase in ________ resources which will be ________
- difficult
- productive
- expensive
therefore unlikely that the firm will increase S - relatively inelastic
T as a PES determinant
amount of time over PES is measured affects value
- the longer time considered –> more elastic S
- with time they can increase FOPs
A as a PES determinant
if a firm is able to store lots of inventory they will be able to react to price increases by quickly increasing Qs
PES is relatively elastic
PES for primary commodities
relatively inelastic
would take time to grow more and reallocate FOPs
PES for manufactured commodities
relatively elastic
there could be unused capacity, FOPs are mobile, can store lots of stock
combination of relatively inelastic demand and supply of commodities will lead to…
large swings in prices - price volatility
