Price Elasticity of Supply

Question 1

What is the relationship between price and supply?

Answer 1

• As price increases, supply increases.

Question 2

What is the Price Elasticity of Supply?

Answer 2

• A measure of the responsiveness of supply to a change in price.
• It will always be positive.

Question 3

What is the formula of the Price Elasticity of Supply?

Answer 3

• Percentage change in quantity supplied divided by the percentage change in price.

Question 4

What is the range for Price Inelasticity of Supply?

Answer 4

• 0 to 1.

Question 5

What is the PED co-efficient for Price elasticity of Supply?

Answer 5

• 1 to infinity

Question 6

What does it mean if a good has a Perfectly inelastic supply curve?

Answer 6

• It will have a PES co-efficient of 0.
• If price was to change, the quantity supplied would not be affected.
• In theory, the firm would supply the same amount at any given price.

Question 7

What does it mean if a good has a Price inelastic supply curve?

Answer 7

• A price inelastic supply curve will have a PES coefficient between 0 and 1.
• If price was the change the quantity supplied would change by a lesser amount.
• Due to difficulties in increasing supply, incentive to increase supply is not great enough for some firms.

Question 8

What does it mean if a good has a Price elastic supply curve?

Answer 8

• A price elastic product will have a PES co-efficient between 1 and infinity.
• If price changes ,the quantity supplied would change by a greater amount.
• Firms found it easy to increase supply or the incentive to increase supply has become greater.

Question 9

What does it mean if a good has a Perfectly elastic supply curve?

Answer 9

• A perfectly elastic product will have a PES co-efficient of infinity.
• If price was to stay the same or increase, the quantity supplied would be infinite.
• If price was to decrease the quantity supplied would fall to zero.

Question 10

How is Price a Determinant of Elasticity of Supply?

Answer 10

• Increases in price act as an incentive for firms to increase supply.
• Higher price levels, a firm is more profitable as the contribution per unit (selling price - variable cost) is higher.

Question 11

How is Availability of substitutes a Determinant of Elasticity of Supply?

Answer 11

• When factor substitution is possible and can be achieved at low cost, supply will be elastic.
• When factors are highly specialised, substitution may be harder and thus supply will be inelastic.

Question 12

How is capacity a Determinant of Elasticity of Supply?

Answer 12

• When there is spare capacity, businesses can expand output easily to meet rising demand without upward pressure on costs.

Question 13

How is Stock a Determinant of Elasticity of Supply?

Answer 13

• A low level of stocks makes supply inelastic.
• When stocks can be release onto the market, supply is elastic.

Question 14

How is Time a Determinant of Elasticity of Supply?

Answer 14

• Momentary period (fixed supply)
• Short run (inelastic supply)
• Long run (elastic supply)

Question 15

How is Artificial limits on supply a Determinant of Elasticity of Supply?

Answer 15

• The impact of patents that limit which firms can supply a product.