Price Elasticity of Supply Flashcards
What is PES?
Measures the % change in the quantity supplied of a product following a % change in the price.
ie. how able producers are to respond to a change in price.
What does a PES value of 0 mean?
Perfectly inelastic supply
What does a PES value of 0-1 mean?
Inelastic supply
What does a PES value of 1 mean?
Unit elastic supply
What does a PES value of >1 mean?
Elastic supply
What does a PES value of / mean?
Perfectly elastic supply
What is elastic supply?
When the % change in quantity supplied is greater than that % change in price. Producers find it easier to respond to changes in price.
What are the main reasons for elastic supply?
Spare production capacity
Short production process
High stocks of raw materials/finished products available
What does inelastic supply mean?
The % change in quantity supplied is less than the % change in price. Producers find it difficult to respond to changes in price.
What are the main reasons for inelastic supply?
No spare capacity
Long production process
No stocks available
What are the main factors that determine price elasticity of supply?
Length of the production process
Space capacity available
Stocks of raw materials/finished products
Time allowed to adjust to price changes
Ease and cost of switching factors of production
Length of the production process?
Short = elastic
Long = inelastic
Spare capacity?
Yes = elastic
No = inelastic
Stocks of raw materials/finished products?
High = elastic
Low/lack of = inelastic
Time allowed to adjust?
Short term = inelastic
Long term = elastic
