Elasticity Of Supply (Micro) Flashcards
What is price elasticity of supply
The relationship between change in quantity supplied and a change in price
What is the effect of elastic supply for producers
Producers can increase their output without a rise in cost or a time delay
What is the effect of an inelastic supply for producers
Firms find it difficult to change their production in a given time period
What is the formula for price elasticity of supply?
% change in quantity demanded
—————————————————
% change in price
What numerical value is price elastic?
PES > 1
What numerical value is price inelastic?
PES < 1
What numerical value is perfectly price inelastic
PES = 0
What numerical value is perfectly price elastic?
PES = infinity
What are 4 factors affected price elasticity of supply?
1) spare production capacity
2) stock of finished products and components
3) availability of producer substitutes/factor mobility
4) time period (and production speed)
How does spare production capacity affect PES
If there is plenty of spare capacity then a business can increase output without a rise in costs and supply will be elastic in response to a change in demand
How will stocks of finished products affect PES
If stocks of raw materials and finished products are at a high level then a dime will be able to respond to a change in demand - supply will be elastic.
Perishable goods are often harder/more expensive to store
How will the availability of producer substitutes affect PES
There are goods which producers can easily produce as alternatives. If capital and labour are mobile then the elasticity of supply for a product is likely to be high
How will the time period (production speed) affect PES
Supply is more price elastic the longer the time that a firm is able to adjust its production levels
