PES

Question 1

Price Elasticity of Supply (PES)

Answer 1

Price Elasticity of Supply: Responsiveness of a change in supply to a change in price
- PES = %△Qs/%△ P

• Elastic: Firms can increase supply quickly at little cost, PES >1
• Inelastic: Increase in supply expensive for firms & take long, PES<1
• Perfectly Inelastic: Supply is fixed, change in demand cannot be met easily, PES = 0
• Perfectly Elastic: Any quantity demanded can be met without changing price, PES = infinity

Question 2

Factors Influencing PES

Answer 2

Factors Influencing PES:
-Time Scale: SR = more inelastic, producers cannot quickly increase supply. LR = more elastic
- Spare capacity: If firm operating at full capacity, no space left to increase supply. Spare resources (e.g labour in recession), supply = elastic.
- Level of Stocks: If goods can be stored, can keep stock & increase supply. Perishable goods (e.g eggs) cannot stock, so more inelastic
- Substitutability: If factors are mobile, resources can be allocated to where supply is needed (e.g workers w/ transferable skills, can be moved to produce a different good, increasing supply)
- Barriers to Entry: Higher barriers = more inelastic, because it is difficult for new firms to enter & supply