9 : price elasticity of supply Flashcards
how to calculate price elasticity of supply
(pes)
change in quantity original price
—————————— x ————————-
original quantity change in price
pes > 1 = price elastic
pes < 1 = price inelastic
pes = 1 is unitary-elastic
pes = 0 is perfectly inelastic
pes = infinity is perfectly inelastic
what are the factors affecting price elasticity of supply ?
remember : PSSST
Production lag : is the time it takes to make a product after starting production
Stocks : if stocks are high producers are able to respond to changed in demand and price quickly
Spare capacity : businesses with lots of capacity it is much easier for them to respond to changes in demand and price
substitutability pf production : the more substitutable the factors of production are the easier it is to respond to changes in demand and price
Time : in the short run there is at least one fixed factor of production (capital and land)
long run all factors are variable . supply is price inelastic in the short run and price elastic in the long run
how do businesses protect themselves from potential losses ?
increasing the level of stock : investing in a new ware house or increasing the size of existing storage
investing in new factory of office space : to increase fleet of vehicles or machinery
shortening the length of the production lag :
by investing in more up to date ,better quality machines or increasing the number of worker to become more productive
why is PED and PES important to the government in decision making ?
issues with taxation :If people don’t reduce demand much when prices go up (like for alcohol), taxes mostly increase revenue but don’t cut consumption much. For goods with high elasticity, taxes reduce demand more effectively.
issues with subsidies : Governments give subsidies to make important goods (like education or healthcare) cheaper and encourage more use. But if demand for these goods is inelastic (people already want them, regardless of price), the subsidy only slightly increases consumption.
