Pack 7

Question 1

Formula for PES

Answer 1

% change in QS / % change in price

•PES figure is always positive

Question 2

Define PES

Answer 2

A measure of the responsiveness of QS to a change in the price of a good/service.

Question 3

Explain 4 factors affecting PES

Answer 3

Stockpiling - if the product is small enough to be stocked in bulk and if it can stay good for a long period of time, PES is elastic.

Spare capacity - if the business is not using all their available resources efficiently then PES is relatively elastic since they can easily increase production.

Barriers to entry - if the industry is easy to enter, like car washing, it is relatively elastic but if it is hard to enter, like making a phone, it is relatively inelastic.

Time period - if it takes long to make its relatively inelastic and if its short to make its relatively elastic.

Question 4

What would a PES figure of 0 mean

Answer 4

Perfectly inelastic supply - QS is completely unresponsive to changes in price, supply curve is vertical (example is netflix).

Question 5

What would PES of infinity mean

Answer 5

Perfectly elastic supply - supply curve is horizontal, firms are willing to supply any amount at the given price.

Question 6

What would a PES below 1 mean

Answer 6

Relatively price inelastic supply - % change in QS is less than % change in price (10% increase in price leads to 5% increase in output)

Question 7

Explain PES of 1

Answer 7

Unit elastic supply - % change in QS is the same as % change in price.

Question 8

Explain PES above 1

Answer 8

Relatively price elastic supply - % change in QS is greater than % change in price (1% increase in price leads to 2% increase in output).