Price Elasticity of Supply

Question 1

PES formula

Answer 1

percentage change in quantity supplied / percentage change in price

Question 2

Perfectly elastic, inelastic

Answer 2

same as demand, inelastic vertical PES 0, elastic horizontal PES infinity

Question 3

Determinants of Elasticity of Supply

Answer 3

P - Production lags – e.g. if good takes long time to produce then will be more inelastic

S ¬- Spare capacity (in FOP) e.g. FOP not used to full potential

S - Stock (how much space in warehouse or how much it costs to store)

S - Substitutability of goods (producer substitutes) or FOP (e.g. piece of land used for factory instead of school)

T - Time period – short vs long run – more elastic in the long run as you can get e.g. more workers or land

Question 4

How can PES be used for business decisions

Answer 4

if PES is inelastic (less than 1) firms can use this info to know that they must try become more elastic so they can capitalise on higher prices faster