Price elasticity of supply (PeS)

Question 1

What does PeS measure??

Answer 1

Measures the responsiveness of quantity supplied of a product to changes in the price of the product. If prices rise, to what extent will quantity supplied for that product change.

Question 2

How do you measure PeS??

Answer 2

%change in Quantity supplied / %change in price

Question 3

What are the two main features of PeS??

Answer 3

1) Availability of materials and other factors of production. finding the equipment, space, staff and finances to increase supply. may have stockpiles available.
2) Time- over a long time period, almost all products are price elastic in supply. Businesses can adjust to higher prices given enough time. Short term- many products are inelastic.

Question 4

Why is time so important for PeS?

Answer 4

Overtime you can change your business completely to increase supply. If firms have spare capacity they can adapt faster (elastic) or without spare capacity they need longer to change (inelastic). Stockpiles increase elasticity too, less pressure to increase production as they have supply readily available.

Question 5

How can the type of labour needed affect elasticity??

Answer 5

If high skilled labour required, it’ll be scarce and harder to find, so you have more inelastic supply

Question 6

How does the type of industry affect elasticity??

Answer 6

Agricultural products more inelastic than service industries like hotels because they take longer to produced products and are less likely to have stockpiles.

Question 7

Why is elastic PeS important??

Answer 7

Higher prices usually mean higher profit- if they can’t change their production levels quickly and exploit higher prices then they miss out on profit. they want elastic PeS so they can react well to price changes and maximise profits

Question 8

How do you increase PeS?

Answer 8

Create spare capacity
Better technology
keeping stockpiles
Better storage options (eg fridges/freezers)
prolonging shelf life of products
flexible skill set of workers
Better distribution system

Question 9

Pssst?

Answer 9

Production lag - longer the production lag the more price inelastic (hard to respond to an increase in production when theres production lag)

Stocks - larger levels of stock the more price elastic something will be / easy to respond to an increase in price or demand

Spare capacity - More spare capacity more price elastic something will be / as demand goes up you can just utilise your capacity

Substitutability of FoPs - the more substitutable factors of production are to a change in demand or price, the easier it is to respond, therefore being more elastic

Time - Short run supply is price inelastic whilst long run its elastic. In the short run there is at least one fixed factor of production usually 2 (land and capital) in the short run its very difficult to increase these factors of production - inelastic