Chapter 12: Price Elasticity of Supply

Question 1

Price elasticity of supply

Answer 1

A measure of the responsiveness of the quantity supplied to a change in price.

PES = Percentage change in quantity supplied / Percentage change in price

Question 2

Interpreting values of PES

Answer 2

As the quantity supplied and price are directly related, PES is a positive figure. The figure indicates the degree of responsiveness of the quantity supplied to a change in price. The higher the figure, the more responsive supply is. A PES of 2.6, for example, means that a 1% rise in price will cause a 2.6% extension in supply.

PES>1 elastic
PES = 1 unitary elasticity
PES<1 inelastic
PES = 0 perfectly inelastic
PES = infinity perfectly elastic

Question 3

Determinants of PES

Answer 3

• Time taken to produce
• Costs of changing supply
• Whether it can be stored/stockpiled,
• Mobility of factors of production
• Time frame

Question 4

Changes in PES

Answer 4

• The supply for most of the products becomes more elastic as the time period increases.
• Producers have more time to adjust their supply

Question 5

Implications of PES for decision making

Answer 5

Consumers: Consumers benefit from supply being elastic.

Supply is responsive to consumer demand. If demand increases, prices will rise. If supply is elastic, the quantity supplied will rise by a greater percentage than the change in price. Sales may rise significantly without there being a large increase in price.

Producers: Want their supply to be as elastic as possible. Their profits will be higher, the quicker and more fully they can adjust their supply in response to changes in demand and hence price.

Government: Want to encourage the output and consumption of a product they are likely to be more successful giving a subsidy to producers if supply is elastic. Governments use a variety of policy measures to promote flexibility in production, for example a number of governments have changed the law making it easier for firms to hire and fire labour.