Price Elasticity Of Supply

Question 1

Meaning of Price Elasticity of Supply

Answer 1

A measure of the responsiveness of the quantity supplied to changes in the price of a good

Question 2

Determinants of PES

Answer 2

1) the extent of which spare capacity exists

2) the ability to store the product ( Amt of storage)

3) Mobility of Factors of production
-it refers to the ease of FOP to switched to producing other goods

4) Nature of the good
- eg: agricultural goods are more perishable while manufactured goods has longer shelf life

Question 3

Application of PES

Answer 3

1) Production Planning
- With knowledge of PES, firms may invest in technology or processes that increase the PES,allowing them to better response to market

2) Inventory management
- firms dealing with inelastic supply may focus on efficient inventory management to minimise losses from perishable goods

Question 4

Application of PES (government)

Answer 4

1)Agricultural Policy
- Government needs to understand OES of agricultural goods to plan effective price stabilisation policy
- Goods with low PES can lead to volatile prices, thus government may use subsidy or buffer stocks to stabilise supply and price

2. Infrastructure and Investment Planning
   - Incentives : government may provide subsidies for firms to adopt technology to enhance supply flexibility
3. Taxation
   - government can impose taxes on good where supply is more inelastic