Price Elasticity of Supply Flashcards
What is the definition of price elasticity of supply?
Price elasticity of supply measures the responsiveness of quantity supplied to a change in price
Give the formula for PES
% Change in Quantity Supplied / % Change in Price
What is meant by ‘price elastic supply’?
the responsiveness of a supply of a good or service after a change in its market price
What values would constitute ‘price elastic supply’?
- PES > 1: Supply is elastic
- PES < 1: Supply is inelastic
- PES = 0: The supply curve is vertical
What is meant by ‘perfectly price elastic supply’?
Perfectly elastic means the response to price is complete and infinite
What values would constitute ‘perfectly elastic supply’?
a change in price results in the quantity falling to zero
What is meant by ‘price inelastic supply’?
if the availability of that good does not change significantly in response to price changes
What values would constitute ‘price inelastic supply’?
The PES for relatively inelastic supply is between zero and one
Give 3 factors which influence the PES of a product
- time
- the mobility of factors of production
- unused capacity
What is meant by ‘perfectly price inelastic demand’?
a good that has a price elasticity of demand value of 0
What values would constitute ‘perfectly inelastic demand’?
the price of a good is zero and quantity demanded is at its maximum possible level
What is the economic definition of the long run?
The long run is a situation in economics wherein all factors of production and costs are variable
What is the economic definition of the short run?
a period where at least one input is fixed, limiting a firm’s ability to adjust its production capacity fully
Why is PES more elastic in the long run?
in the long run all factors of production can be utilized to increase supply
