Chapter 12-Elasticity of Supply Flashcards
price elasticity of supply
PES is a measure of the responsiveness of the quantity supplied to a change in price
Price Elasticity of Supply(PES) Formula
PES= Percentage change in quantity supplied/ percentage change in price
Formula for percentage change in quantity supplied and percentage change in price
Percentage change in quantity supplied= change in quantity supplied/ original quantity supplied X 100
Percentage change in price= change in price/original price X 100
Interpretation of PES
Quantity supplied and price are directly related, hence PES is always a positive number. It indicates how responsive the quantity of supply is to the change in price. The higher the number, the more responsive the quantity supplied is.
Elastic and Inelastic Supply
In elastic supply the higher the figure the more elastic the supply is. This is normally represented on a straight line supply curve that touches the vertical axis.
In inelastic supply the lower the figure of PES the more inelastic the supply is. The quantity supplied changes less than the price in percentage terms. it is represented by a straight line supply curve that’s touching the horizontal axis.
Determinants of Price Elasticity of supply
The time taken to produce it:
less elastic
more inelastic
The cost of altering its supply:
more inelastic
less elastic
The feasibility of storing it:
more elastic
less inelastic
Perfectly Inelastic Supply
perfectly inelastic supply is when a change in price has no effect on the quantity supplied. Eg: if there is high demand to watch a movie in a cinema, the price of the tickets may be increased, but it is unlikely for the number of seats in the theatre to be increased.
Perfectly Elastic Supply
Perfectly elastic supply is when a change in price causes a complete change in quantity supplied. Eg: firms would supply whatever the people wanted at the given price. If the demand was high the supply of the product would increase but the price would remain the same. if the demand would fall the price of the product would remain the same but the quantity supplied would decrease to zero.
Unit Price Elasticity of Supply
Unit price elasticity of supply is when a change in price causes an equal percentage change in the quantity supplied.
Changes in price elasticity of supply
PES varies with time. The supply for most products becomes more elastic as time passes. This is because producers have more time adjust their supply by switching production to other products and building new factories and offices or selling off existing plants. Advances in technology, reducing production periods and increasing efficiency increase elasticity of supply. Eg: the cost of production of magazines has decreased and the speed at which they can be produced increased. This results in new titles being released more often and declining titles disappearing at a faster rate.
Implications for PES decision making
Consumers benefit from elastic supply because elastic supply depends on consumer demand. If supply is elastic the quantity supplied will rise by a greater percentage than the percentage change in price when demand increases. Sales may rise significantly without there being a large increase in price. Producers want their supply to be as elastic as possible so their profits can be higher due to them being able to adjust their supply in response to changes in demand and hence changes in price. When encouraging the output and consumption of a product governments are more successful in giving subsidies if supply is elastic.
