chp 12 Flashcards

1
Q

PES

A

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

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2
Q

Elastic supply

A

Elastic supply: when the quantity supplied changes by a greater percentage than the change in price.

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3
Q

Inelastic supply

A

Inelastic supply: when the quantity supplied changes by a smaller percentage than the change in price.

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4
Q

Various factors determine whether PES is elastic or inelastic.

A

Time taken to produce the product
Spare capacity
Stock availability
Cost of altering supply

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5
Q

Producers want supply to be as ……… as possible

A

Elastic

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6
Q

Agricultar want to be as elastic as possible

A

Producers want supply to be as elastic as possible. This particularly applies in agriculture where producers hope to have some flexibility in the types of product and the volumes of product they put onto the market. For many farmers, though, the supply of what they grow is inelastic due to lengthy growing periods and a lack of suitable storage space.
Consumers also benefit from an elastic supply since this is responsive to changes in demand.

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7
Q

Refer to Figure 12.. Explain why the two supply curves show elastic and
inelastic supply.

A

The left-hand diagram shows an elastic supply curve. The relative change in quantity supplied is greater than the relative change in price.
The right-hand diagram shows an inelastic supply curve. The relative change in quantity supplied is less than the relative change in price.

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8
Q

Suppose the PES of increasing electricity generation from a power station is
0.3. If the price of electricity increases by 10%, what will be the change in the quantity supplied?

A

3%

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9
Q

Explain why manufactured goods tend to have a more elastil PES compared to most agricultural goods.

A

Agricultural goods are usually inelastic in their supply. This is due to the time it takes to increase or decrease production, limitations of what can be grown and where particular crops can be grown, and problems of supply due to weather conditions.
• Most manufactured goods are price elastic in supply. They can be stored and released, or withdrawn from the market depending on price fluctuations.

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10
Q

Discuss whether or not a producer should use PES when deciding whether to expand production in response to a large increase in the market price

A

• If PES is elastic, then it makes sense for a producer to expand production if there is a large increase in the market price. This could be done through releasing stocks or expanding production using existing resources.
• If PES is inelastic, the response is less clear. The increase in supply will take time, during which other suppliers may have increased supply causing the market price to fall.
• PES is just one factor that the producer should consider. Others include whether the large increase in price can be sustained and the opportunity cost of increasing production.

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11
Q

In the last quarter of 2016, the supply of crude oil by OPEC (Organization of the Petroleum Exporting Countries) was deliberately cut by 4%. The price of oil continued to fall. Discuss whether or not this confirms that the PES of crude oil is inelastic.

A

• The fall in supply of OPEC’s crude oil would be expected to result in an increase in price as shown by a shift to the left of the supply curve.
• This has not happened largely on account of other sources increasing supply, more than offsetting OPEC’s cut in supply.
• It is difficult to tell if PES is elastic or inelastic as the fall in price is not given. The limited evidence
other producers.
suggests it is elastic due to increased supply from

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12
Q

How might the concept of price elasticity of supply (PES) be useful for an electric vehicle manufacturer?

A

To determine how many more vehicles to supply when price falls by 5%

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13
Q

The PES for a product is 1.5. If the price increases by 2%, which of these is correct for the percentage increase in the quantity supplied?

A

3

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14
Q

Which is likely to have the most elastic supply?

A

A firm operating below full capacity

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