Elasticity Of Supply

Question 1

What does the law of supply state

Answer 1

The law of supply states that when there is an increase in price (ceteris paribus), producers will increase the quantity supplied and vice versa

Question 2

What is PES

Answer 2

Price elasticity of supply (PES) reveals how responsive the change in quantity supplied is to a change in price

Question 3

How do you calculate PES

Answer 3

% change in quantity supplied / % change in price

Question 4

How do you interpret PES values

Answer 4

0
Perfectly Inelastic
The QS is completely unresponsive to a
change in P (e.g. fixed number of seats in a theatre)

0→1
Relatively Inelastic
The %∆ in QS is less than proportional
to the %∆ in P (e.g agricultural products)

1→ ∞
Relatively Elastic
The %∆ in QS is more than proportional
to the %∆ in P (e.g t-shirts)

∞
Perfectly Elastic
The %∆ in QS will fall to zero with any %∆ in P. However, supply is unlimited at a particular price. This is a very theoretical scenario but is evident when examining international trade diagrams

Question 5

What factors influence PES

Answer 5

Mobility of the factors of production: if producers can quickly switch their resources between products, then the PES will be more elastic. For example, if prices of hiking boots increase and shoe manufacturers can switch resources from producing trainers to boots, then boots will be price elastic in supply
Availability of raw materials: if raw materials are scarce then PES will be low (inelastic). If they are abundant, PES will be higher (elastic)
Ability to store goods: if products can be easily stored then PES will be higher (elastic) as producers can quickly increase supply (for example, tinned food products). An inability to store products results in lower PES (inelastic)
Spare capacity: if prices increase for a product and there is capacity to produce more in the factories that make those products, then supply will be elastic. If there is no spare capacity to increase production, then supply will be inelastic
Time period: In the short run, producers may find it harder to respond to an increase in prices as it takes time to produce the product (e.g., avocados). However, in the long run they can change any of their factors of production so as to produce more

Question 6

What are the factors of production

Answer 6

Land: non man made resources used in production (e.g. coal)
Capital: man made resources used in production (e.g. MRI machine or fertiliser)
Labour: people involved in the production process
Entrepreneurship: the individual(s) involved in organising the other factors of production

Question 7

What is short run period

Answer 7

Economists differentiate between the short-run and the long-run periods of production and these definitions relate to the factors of production. It is not a physical period of time
Short-run is any period of time in which at least one factor of production is fixed and this is a limiting factor. For example, Lego may be able to vary all factors of production in the short-run, except for the number of factories (capital) that they have

Question 8

What is long run period

Answer 8

Long-run is any period of time in which all the factors of production are variable (it is also called the planning stage). Producers are able to vary all of their resources so as to respond to changing market conditions. For example, Lego could build a new factory so as to take advantage of higher prices or greater demand