Price Elasticity of Supply

Question 1

What is price elasticity of supply?

Answer 1

PES- responsiveness of supply for 🚘- due to change in its price

Question 2

What is price elastic supply?

Answer 2

Supply is said to be price elastic when a change in price causes a proportionately larger change in supply

Question 3

What is price inelastic supply?

Answer 3

Supply is said to be price inelastic when a change in price causes a proportionately smaller change in supply

Question 4

How do you calculate price elasticity of supply?

Answer 4

PES= % change in quantity supplied of good A/% change in price of good A

Question 5

What is unique about all PES values?

Answer 5

They are all positive

Question 6

State what the PES values say about the elasticity of the good

Answer 6

Greater than 1= Elastic  
Between 0 & 1= Inelastic 
Equal to 1= Unitary
Equal to 0= Perfectly Inelastic 
PES infinite ♾= Perfectly Elastic

Question 7

What are the determinants/conditions of Price Elasticity of Supply:

Answer 7

1) Time required to produce the product 🕰 - ⬆️ 🕰 taken = ⬆️ price inelasticity of supply- firms cannot respond to changes in price quick enough e.g. housing development
2) Level of spare capacity- ⬆️ spare capacity = ⬆️ price elasticity of supply- factors of production available to be used- price increase-> firms ⬆️ production (profit maximisers)
3) Number of stocks/Finished 🚘 available- ⬆️ finished 🚘 available = ⬆️ price elasticity of supply- ⬆️ in price-> firms putting all stocks onto market (profit maximisers)
4) Perishability of the product- ⬆️ perishable = ⬆️ price inelastic- harder to build up stocks of product e.g. 🍄
Agricultural goods = perishable BUT manufactured goods = non-perishable
5) State of Economy- recession e.g. = ⬆️ unemployed resources … ⬆️ spare capacity- elastic
6) Ease of entry into industry- high entry barriers = supply restricted/inelastic
7) Time ⏰ period under consideration
Short run- at least 1 factor input- fixed in quantity …difficult to ⬆️ production- INELASTIC- applies to agricultural 🚘 (depends on number of seeds planted- start of the year) & livestock (depend on nurturing animals over several years)
Long run- all factors inputs variable- easy for firm to ⬆️ production … ELASTIC