price elasticity of supply chapter 9 Flashcards
price elasticity of supply (PES)
a numerical measure of the responsiveness of the quantity supplied to a change in the price of the product. this is the only change that occurs, ceteris paribus. the supply can be of a business, producer or the market supply of an industry
price elastic supply
the quantity supplied responds more than proportionately to a change in its price.if the numerical value of PES is greater than 1, then supply is relatively price elastic.
price inelastic supply
the quantity supplied responds less than proportionately to a change in its price. if PES is less than 1, it is relatively price inelastic
How is PES calculated
the percentage change in quantity supplied divided by the percentage in price of the product
PES and graphs
positive PES means the curve is upward sloping
perfectly inelastic
prices or quantities are fixed and are not affected by the other variable. the demand curve is a vertical curve straight line parallel to Y Axis, where the x-axis will be the quantity, and the y-axis will be the price of the product.
perfectly elastic
the demand for the product is entirely dependent on the price of the product. perfectly elastic demand curve will be a straight line (horizontal) on a graph, where the x-axis will be the quantity, and the y-axis will be the price of the product.
what is meant by perfectly inelastic demand
the supply cannot be increased regardless of change in price
what is meant by perfectly elastic demand
a producer may only be willing to supply products for a given price or no less
what is the value of PES if demand is perfectly inelastic
PES is zero.
what is the value of PES if demand is perfectly elastic
PES is infinity
what does a perfectly inelastic graph look like
the demand curve is a vertical curve straight line parallel to Y Axis, where the x-axis will be the quantity, and the y-axis will be the price of the product.
what does a perfectly inelastic graph look like
demand curve will be a straight line (horizontal) on a graph, where the x-axis will be the quantity, and the y-axis will be the price of the product
factors influencing price elasticity of supply
availability of stocks
time period
productive capacity
factors influencing price elasticity of supply: availability of stocks
The ease with which businesses can accumulate or reduce stocks of goods can influence the PES. Stock allows companies to meet variations in demand through changing output rather than changing the price of the product- the more easily manufacturers can do this, the higher the PES. firms that provide services are unable to build up stocks and in most cases the product is ‘perishable’
factors influencing price elasticity of supply: time period
The time period or ease with which producers are able to increase production is also relevant. In the short run, businesses and industries with spare productive capacity tend to have a higher PES. However, shortages of critical factor inputs will often lead to an inelastic PES.
factors influencing price elasticity of supply: productive capacity
Over time, firms may increase their available productive capacity by investing in more capital equipment, often taking advantage of technological advances. Equally, over time, more businesses can enter or leave an industry and this will increase PES.
how can the knowledge of PES help
help to explain the speed and ease with which businesses can respond to changing market conditions.
why should a business hold stock
Businesses can hold stock for variations in demand; when there is an unexpected increase in demand, stock can be released quickly and without too many problems.
what should a business do if the increase in demand persists
In the longer term, if the increase in demand is expected to persist, the scale of the business can be expanded to increase productive capacity. This takes time depending on the scale of change that is required.
