Price Elasticity Of Supply Flashcards
Define price elasticity of supply
measures how much quantity supplied will respond to changes in price
Why is PES always positive?
- if P decrease, (% change in price is negative) = quantity supplied will decrease (% change in Qs will be negative) - producers have less incentive to supply at lower prices - overall our PES will be positive
-if P increases (% change in price is positive) = quantity supplied will increase (% change in Qs will be positive) - as producers have incentive to supply more = make more profit at higher prices - overall our PES will be positive
Define elastic supply and state information about the PES
Where producers are responsive to changes in price = firms can increase supply quickly at little cost
- % change in P < % change in QS
- PES >1
Define inelastic supply and state information about the PES
Where producers are less responsive to changes in price
- an increase in supply will be expensive for firms and take a long time.
- % change in P > % change in QS
- PES is < 1
Define unitary supply and state the PES
- when the % change in QS = % in price
- PES = 1
Define perfectly elastic supply and state the PES
When price doesn’t change when QS changes
- PES = INFINITY
Define perfectly inelastic supply and state the PES
- when QS doesn’t change when price changes
- PES = 0
State the 5 Factors affecting PES
(T.E.A.S.S)
- Time
- state of economy
- Availability of factors of production
- stockpiles and perishability
- spare capacity
Factors influencing PES: define spare capacity and state how this affects PES
Spare capacity - how much space that’s not used.
- when there is little spare capacity, you cannot increase the Qs because there is no capacity to do so = inelastic supply as you cannot respond to changes (unresponsive)
- Lots of spare capacity, you can increase Qs because you can use up the spare capacity there is to provide more = elastic supply as you can respond to changes (responsive)
Factors influencing PES: define Availability of factors of production and state how this influences PES
Availability of factors of production is how easy it is to find these factors.
- If factors are not very available (cannot find easily) = inelastic. if price were to go up, It will be difficult to find factors needed to produce/ replace.
- If factors are very available = (can find easily) . if price rises, supplier could increase Qs - Producers could switch there factors easily = elastic supply (responsive to change in price)
Factors influencing PES: state how the state of the economy will influence PES
- If the state of the economy bad , it will be easier for businesses to increase Qs Because factors of production are very available, so producers can respond a lot to changes in prices = elastic supply
- If the state of the economy is good, it will be harder for Producers to find factors because there factors of production are already in use = cannot respond as much = inelastic supply)
Factors influencing PES: define stockpiles and perishable good and state how this influences PES
A stockpile is a stock of goods held in reserve and perishable goods is a good that goes off easily
- good that are perishable (goes off) like cheese means we cannot keep large stockpiles of it - will go bad and so these goods are inelastic
- Goods that are easy to stockpile = we can keep a large stockpile = If there are any price changes, producers could react quickly = elastic
Factors influencing PES: state how Time period affects PES
- In the short run is when at least one factor of production is fixed. If price were to increase, producers would only be able to increase quantity supplied by a small % because they will be limited by their fixed factors of production = inelastic supply
- in The long run, when all factors of production can be changed - producers have more time to increase factors of production and are able to respond more to chances in price - supply will be more elastic
