Price elasticity of supply Flashcards
Define PES
A measure of the responsiveness of the quantity supplied of a product to a change in its price, in % terms
Give an equation for PES
%changeInSupply/ %changeinPrice
Describe what is meant by relatively price elastic supply
If supply is elastic so PES >1 then firms can increase supply quickly at little cost (small gradient)
Describe what is meant by relatively price inelastic supply
If supply is inelastic so PES <1 then an increase in supply will be expensive for firms and take a long time (large gradient)
Describe what is meant by perfectly inelastic supply
If supply is perfectly inelastic so PES =0 then supply is fixed so if there is a change in demand it cannot be met easily (| line)
Describe what is meant by perfectly elastic supply
If supply is perfectly is elastic so PES =infinity then any quantity demanded can be met without changing price (–line)
If the price of producing wheat increased by 15% and the quantity supplied decreased by 20%, the PES of wheat is:
-20%/15% = -1.33 <0 so the supply of wheat is inelastic
Factors influencing PES
Time scale (short run supply is more price inelastic (0-1) as producers cannot quickly increase supply; in the long run supply become more price elastic (>1)
Spare capacity and ability to increase productive capacity
Levels of finished stock (more stock more PES)
Production time
Availability of substitute producers – the more potential producers who can enter the market the more elastic the quantity supplied be to changes in price
Sustainabiltiy
Protectionism
In short run there are _____, in long run _______
In short run there are fixed factors, in long run all factors are variable
If supply cuts y axis then PES is
elastic
If supply cuts x axis then PES is
inelastic
If supply cuts origin
unitary
PES is usually ____ because
+ve because supply curve +ve
Total revenue =
price*quantity
Elastic supply value
> 1
