A2.02.09: Determinants of PES

Question 1

General Determinants of PES? [PSSST]

Answer 1

• P: Production lag
• S: Stocks
• S: Spare capacity
• S: Substituting of FOPs
• T: Time

Question 2

Explain production lag being a determinant of PES

Answer 2

The longer the production lag for a good or service, the more price inelastic supply is going to be (very hard to respond)

Question 3

Explain stocks being a determinant of PES

Answer 3

The larger the level of stocks, the more price elastic supply is going to be (easy to respond with lots of stocks after an increase in price with an increase in demand)

Question 4

Explain spare capacity being a determinant of PES

Answer 4

The more space capacity available, the more price elastic is going to be (if price increases following demand increasing, firms can just utilise their spare capacity)

Question 5

Explain substituting of FOPs being a determinant of PES

Answer 5

The more substitutable FOPs are in a given firm, the more price elastic supply is (easier to respond by increasing production whether price increases following increases in demand)

Question 6

Explain time being a determinant of PES

Answer 6

In the short run, supply is price elastic meaning there is at least one fixed FOP - Land and Capital being the 2 main ones (harder to respond by increasing production because FOPs can’t be varied)