Micro 7 - Price Elasticity of Supply Flashcards
Define Price Elasticity of Supply
Price elasticity of supply is a measure of how the quantity supplied of a good responds to a change in its price
What does PES mean?
Price Elasticity of Supply
What is the formula for calculating PES?
Percentage change in quantity supplied / Percentage change in price
Does PES have any units?
PES does not have any units, its not a percentage
Why is PES generally positive?
PES is generally positive since the higher the price the greater the supply
What type of PES is indicated by a PES value of greater than 1
Relatively elastic supply
What would the PES value of a good be if supply for the good is relatively elastic?
Greater than 1
What does it mean if the supply for a good is relatively elastic?
A percentage change in price will cause a larger percentage change in quantity supplied
What is the relationship between how high the PES value is and how elastic supply is?
The higher the value of the PES figure the more elastic supply is for the good
What does a PES of 8.5 mean?
A 1% change in price leads to a 8.5% change in supply
What type of PES is indicated by a PES value of ± infinity?
There is perfectly elastic supply
What PES value indicates perfectly elastic supply?
± infinity
What does it mean if a product has perfectly elastic supply?
A fall in price of a product means that the quantity supplied will be reduced to zero
What type of PES is indicated by a PES figure of between 0 and 1?
Relatively inelastic supply
What type of PES figure indicates relatively inelastic supply?
A PES figure of between 0 and 1
What does relatively inelastic supply mean?
A percentage change in price will cause a smaller percentage change in quantity supplied
What is the relationship between the size of the PES value and how inelastic supply is?
The smaller the value of PES the more inelastic supply is
What does a PES figure of 0.5 mean?
For every 1% change in price there is a 0.5% change in quantity supplied
What type of supply does a PES of 0 indicate?
Perfectly inelastic supply
What PES figure indicates perfectly inelastic supply?
A PES figure of 0
What does perfectly inelastic supply mean?
A change in price will have no effect on the quantity supplied. At any price the quantity supplied will be the same
What will a supply curve representing relatively elastic supply look like?
Relatively flat
What does a supply curve representing perfectly elastic supply look like?
A horizontal line
What does a supply curve representing relatively inelastic supply look like?
Relatively steep
What does a supply curve representing perfectly inelastic supply look like?
A vertical line
What does a supply curve representing unit elasticity of supply look like?
A straight line through the origin
What type of supply does a PES value of 1 represent?
Unit elasticity of supply
What PES value represents unit elasticity of supply?
A PES value of 1
What does it mean if a good has unit elasticity of supply?
A good has unit elasticity of supply if the percentage change in quantity supplied is equal to the percentage change in price
Is a high or a low PES important to firms?
A high PES
Why is a high PES important to firms?
Firms aim to respond quickly to changes in price and demand.
To do so they need to make their supply as elastic as possible
Measures undertaken to improve the elasticity of supply include flexible working patterns, using the latest technology and having spare production capacity.
Is supply price elastic or inelastic in the short run?
Price inelastic
Why is supply likely to be more price inelastic in the short run compared to the long run?
Over short periods of time firms can find it difficult to switch production from one good to another therefore supply is likely to be more price inelastic in the short run
What is the short run?
The short run is the time period when a firm’s capacity is fixed, and at least one factor of production is fixed.
Which factor of production is normally fixed in the short run?
Capital is often the factor of production that is fixed in the short run.
A firm can recruit more workers and buy more materials but it takes time to build additional production facilities. This means that it can be difficult to increase production in the short run so supply in the short run is inelastic.
What is the long run?
In the long run all the factors of production are variable so in the long run a firm is able to increase its capacity.
This means that supply is more elastic in the long run because firms have longer to react to changes in price and demand
What does the distinction between the long run and short run vary with?
The distinction between the long run and short run varies with different industries.
For example the long run for a firm that makes sandwiches will be a shorter time than that of a firm which builds ships - to change production levels in ship building requires more capital equipment and more planning. Because ships take longer produce than sandwiches the supply of ships is more inelastic
What factors affect PES?
- Availability of stocks of the product (Stockpiling)
- Spare capacity
- Barriers to entry
- Time period being considered
- If the good is perishable or not
- The state of the economy
During periods of unemployment does supply tend to be more elastic or inelastic?
During periods of unemployment supply tends to be more elastic as its easy to attract new workers if a firm wishes to expand
Do perishable goods have an elastic or inelastic supply?
Perishable goods have an inelastic supply as they cannot be stored for very long
Do firms with a high stock level have elastic or inelastic supply?
Firms with high stock levels often have elastic supply as they are able to increase supply quickly if they want to
Do industries with more mobile factors of production have elastic or inelastic supply?
Industries with more mobile factors of production tend to have more elastic supply.
For example industries that employ lots of unskilled workers may find it easy to increase their labour force
