5. Elasticity of Supply PES

Question 1

what is price elasticity of supply

Answer 1

measure of how much the supply of a product changes when there is a change in price

Question 2

PES (calculation)

Answer 2

%changeinQs/%changein P

Question 3

if PES= 0 then..

Answer 3

a change in P will have no effect on Qs - perfectly inelastic supply
- P1, p2, p3 = Q

Question 4

when might we see a perfectly inelastic supply curve (think time)

Answer 4

in the very short run - immediate time period

- impossible for firms to increase supply straight away until new FOPs are employed

Question 5

if PES=∞..

Answer 5

perfectly elastic supply - any change in P will result in infinite amount of chang in Q

Question 6

1>PES>0 means a product has…

Answer 6

inelastic supply - a change in P –> a less than proportionate change in Qs

Question 7

∞>PES>1 means a product has…

Answer 7

elastic supply - a change in P –> greater than proportionate change in Qs

Question 8

PES=1 means a product…

Answer 8

has unit elastic supply - a change in P –> proportionate change in Qs

Question 9

determinants of PES

Answer 9

CAT
Costs of production
Ability to store stock
Time period considered

Question 10

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 __________

Answer 10

1. will not raise
2. relatively inelastic

BECAUSE - it takes large price rises to make increasing supply profitable

Question 11

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

Answer 11

1. raise
2. low
   to make more profits

Question 12

C as a PES determinants: name the factors that assist in preventing a significant rise in costs

Answer 12

ME
Mobility of FOPs
Existence of unused capacity

Question 13

M: mobility of factors of production

If FOPs are easily moved from one productive use to another PES will be….

Answer 13

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

Question 14

unused capacity

Answer 14

productive resources that are not being fully used

Question 15

E: if a firm has lots of unused capacity, it will be able to _____output easily and without great costs _______

Answer 15

1. increase
2. increases
   therefore PES is relatively high

Question 16

E: if a firm is producing at capacity then it is ______ to increase S without an increase in ________ resources which will be ________

Answer 16

1. difficult
2. productive
3. expensive
   therefore unlikely that the firm will increase S - relatively inelastic

Question 17

T as a PES determinant

Answer 17

amount of time over PES is measured affects value

• the longer time considered –> more elastic S
• with time they can increase FOPs

Question 18

A as a PES determinant

Answer 18

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

Question 19

PES for primary commodities

Answer 19

relatively inelastic

would take time to grow more and reallocate FOPs

Question 20

PES for manufactured commodities

Answer 20

relatively elastic

there could be unused capacity, FOPs are mobile, can store lots of stock

Question 21

combination of relatively inelastic demand and supply of commodities will lead to…

Answer 21

large swings in prices - price volatility