Price Elasticity of Supply and Demand Flashcards
Define price elasticity of supply
Price elasticity of supply measures the responsiveness of quantity supplied to a change in price.
What is the formula for PES
PE(s) = % change in Q(s) / % change in price
What are the determinants of PES
- Time
- Nature of Industry
- Ability to store inventories
When elasticity of supply = 0, what is supply?
Perfectly inelastic
When elasticity of supply is infinite , what is supply?
Perfectly elastic
Name and explain the three term economists use to describe time periods
Short run: the supply of at least 1 factor of production is fixed (e.g. the size of the factory)
Long run: the supply of all factors or resources can be varied but no new technology is available.
Very long run: the supply of all factors or resources can be varied and new technology can be built into production processes
Why do agricultural and manufactored goods have a different price elasticity?
Agriculture = price inelastic
Manufactured = price elastic
This is because agricultured goods takes a lot longer amount of time to produce (over 12 months). For example if the price of wheat suddenly increases, farmers cannot respond quickly.
Manufactures on the other hand take very little time to respond to changes.
Price elasticity of demand definition
the responsiveness of quantity demanded to a change in price
What are the determinants of PED?
The availability of substitutes
Whether it is a necesity
Urgency
Complementary goods
An increase in supply causes the supply curve to shift:
left
A decrease in supply causes the supply curve to shift:
right
A decrease in demand causes the demand curve to shift:
left
An increase in demand causes the demand curve to shift:
right
