LS13 - Price Elasticity of Supply

Question 1

What is the price elasticity of supply?

Answer 1

Price elasticity of supply measures the responsiveness of supply given a change in price

Question 2

When is supply price elastic?

Answer 2

Supply is price elastic when a change in price causes a proportionately larger change in supply

Question 3

When is supply price inelastic?

Answer 3

If a change in price causes a proportionately smaller change in supply, supply is said to be price inelastic

Question 4

What are the determinants of price elasticity of supply?

Answer 4

Time required to produce the product
Level of spare capacity
Number of stocks/finite goods available
Time
Perishability of the product
Obsolete Stock

Question 5

How does time required to produce the product impact price elasticity of supply?

Answer 5

The shorter the amount of time needed to produce the product, the more price elastic supply will be. Firms are able to respond to changes in price rapidly

Question 6

How does level of spare capacity impact the price elasticity of supply?

Answer 6

The greater the spare capacity is in an industry, the more price elastic supply will be. This is because there will be more factors of production available to use so firms can respond to a rise in price

Question 7

How does the number of stock/finished goods available impact the price elasticity of supply?

Answer 7

The more finished goods available, the more price elastic supply will be. This is because firms will be able to respond to a price rise by releasing more of these stock to the market

Question 8

How does the amount of time impact the price elasticity of supply?

Answer 8

Time gives firms the opportunity to expand or reduce production. Therefore, the greater the time period, the more price elastic supply will be

Question 9

How does the perishability of the product impact the price elasticity of supply?

Answer 9

Some products are more perishable than others. The more perishable a product is, the harder it is to build up stocks of it. Therefore, the more price inelastic the supply of the product will be

Question 10

What is perishability?

Answer 10

Perishability is how quick something goes off

Question 11

How does obsolete stock impact the price elasticity of supply?

Answer 11

An obsolete product becomes old as a result of technological advancement. More stock of obsolete products are more price inelastic as they cannot respond to price changes

Question 12

What is the formula for the price elasticity of supply?

Answer 12

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

Question 13

What is the range of PES values for elastic supply?

Answer 13

x > 1

Question 14

What is the range of PES values for inelastic supply?

Answer 14

0.01 < x < 1

Question 15

What is the PES value for unitary supply?

Answer 15

x = 1

Question 16

What is the PES value for perfectly inelastic supply?

Answer 16

x = 0

Question 17

What is the PES value for perfectly elastic supply?

Answer 17

x = Infinite

Question 18

What does it mean if a market is in unitary?

Answer 18

This means a change in price is equal to a change in quantity supplied. Therefore, total revenue is constant

Question 19

What does a perfectly inelastic supply mean?

Answer 19

This is where the quantity supplied of a good does not change in response to a change in price. This leads to a vertical line. This could apply to the amount of land available on an island

Question 20

What does perfectly elastic supply mean?

Answer 20

This is where quantity supplied of a good changes infinitely with any change in price. This leads to a horizontal line. This could apply to a supplier producing unlimited quantities but stopping entirely if the price drops