Price Elasticity Of Supply Flashcards
Price elasticity of supply shows
How supply changes with price.
Price elasticity of supply PES is a measure of
How the quantity supplied of a good responds to a change in its price.
PES formula
Percentage change in quantity supplied
/
Percentage change in price
PES can be
Elastic, inelastic or unit elastic
Elastic (relatively elastic) supply
PES>1
If the supply of a good is elastic is means
A percentage change in price causes a larger percentage change in quantity supplied.
The higher the value of PES, the more elastic supply is for the good.
Inelastic (relatively inelastic supply)
PES is between 0 and 1.
Inelastic supply means
A percentage change in price will cause a smaller percentage change in quantity supplied.
The smaller the value the more inelastic.
Perfectly elastic supply
PES of +- infinity any fall in price means quantity supplied reduced to 0
Perfectly inelastic supply
PES = 0
Any change in price will have no effect on the quantity supplied.
Unit elasticity of supply
PES=1
Percentage change in quantity supplied is equal to the percentage change in price
A high PES is
Important for firms
Why is a high PED important for firms??
Because firms aim to respond quickly to changes in price and demand.
So they need to make their supply as elastic (responsive to price changes) as possible.
How do you make supply more elastic?
Flexible working patterns
Using latest technology
Having spare production capacity.
Supply is price inelastic in the
Short run
Why is supply price inelastic in the short run?
Because firms can find it difficult to switch production from one good to another.
Therefore supply is likely to be more price inelastic in the short run than in the long run.
Short run
This is the time period when a firms capacity is fixed and at least one factor of production is fixed.
Capital is often the factor of production that is fixed in the short run.
Difficult to increase production in the short run, so supply in short run is inelastic.
Long run
In the long run all the factors of production are variable. So in the long run a firm is able to increase its capacity.
Supply is more elastic in the long run because firms have longer to react to changes in price and demand.
What other factors affect PES
Unemployment periods supply more elastic
Perishable goods have inelastic supply cant be stored for long
Firms with high stock levels more elastic supply.
Industries with more mobile factors of production more elastic supply.
