Supply elasticity

Question 1

What is price elasticity of supply?

Answer 1

how responsive the quantity supplied is for a good or service when price changes.

Question 2

What are the determinants of PES?

Answer 2

• Time
• Mobility of factors of production
• Unused capacity
• Ability to store
• Rate at which costs increase

Question 3

Explain the determinant ‘time’

Answer 3

Given enough time, most goods are supply elastic as factories can be built/upgraded to provide for more supply. More time therefore increases PES.

Question 4

Explain the determinant ‘mobility of factors of production’

Answer 4

If it is easy to employ more people, buy more land, or build new capital, it is easier to supply more if needed. More mobility therefore increases PES.

Question 5

Explain the determinant ‘unused capacity’

Answer 5

If factories have unused machines, it is quite easy to increase supply. More spare capacity therefore increases PES.

Question 6

Explain the determinant ‘ability to store’

Answer 6

If the good is easy to store, excess supply can be stored for the future, in case the price increases. Better ability to store therefore increases PES.

Question 7

Explain the determinant ‘rate at which costs increase’

Answer 7

If it costs the firm a lot to make additional goods, it will hesitate before producing/supplying more. Higher additional costs therefore decreases PES.

Question 8

Why is the PES for primary commodities generally lower than manufactured goods?

Answer 8

• takes longer to produce
• harder to store
• low mobility of factors of production (harder to get new land than buying machinery)