Price Elasticity of Supply

Question 1

What is the formula for PES?

Answer 1

PES= % change in Quantity Supplied / % change in Price

Question 2

What is PES Used to Measure?

Answer 2

Measures how responsive quantity supplied is to chnages in price i.e. how much does supply change when we change the price.

Question 3

What are the rules of PES?

Answer 3

=0 - perfectly inelastic
<1 - Price inelastic
=1 - unitary elastic
>1 - Price elastic
The higher the number the more price elastic supply is

Question 4

Why is Price Elasticity of Supply Always Positive?

Answer 4

Represents the +positive relationship between price supply i.e. if prices rise then supply rises and vice versa.

Question 5

What is the Price Elasticity of Supply Affected By?

Answer 5

-Availability of producer substitutes (many substitutes=high elasticity)
-Time-Based factors
-The shorter the period of time the more difficult producers find it
to switch what they are making.
-Some items take a long time to make the longer it takes the more
in-elastic
-Capacity (high capacity =inelastic supply…)

Question 6

What are the uses for Price Elasticity of Supply?

Answer 6

So firms can respond as quickly as possible to changes in price and demand

To make their supply as elastic as possible and take measures to improve the elasticity of their supply e.g. train flexible staff, update tech, spare capacity etc.

Question 7

What are the limitations of Price Elasticity of Supply?

Answer 7

-Values-based off estimates
-info used to calculate PES could become outdated
-Other factories may shift the supply curve cancelling the QS affect
-PES ignores the costs
-Elasticity likely to change over time so only useful short term