Topic 3 - Price elasticity of supply

Question 1

Price Elasticity of Supply =

Answer 1

Measures the responsiveness of quantity supplied to a change in price

Question 2

Supply is ELASTIC when…

Answer 2

a change in price leads to a larger change in quantity supplied (more responsiveness)

Question 3

Supply is INELASTIC when…

Answer 3

a change in price leads to a smaller change in quantity supplied (less responsiveness)

Question 4

PES Formula =

Answer 4

% change in Quantity Supplied / % change in Price

Question 5

Supply is PRICE ELASTIC when…

Answer 5

PES is GREATER than 1

Question 6

Supply is PRICE INELASTIC when…

Answer 6

PES is LESS than 1

Question 7

Supply is UNITARY when…

Answer 7

PES is EXACTLY 1

Question 8

Supply is PERFECTLY ELASTIC when…

Answer 8

PES is infinity

Question 9

Supply is PERFECTLY INELASTIC when…

Answer 9

PES is 0

Question 10

Determinants of PES =

Answer 10

1) Length of production period (the longer the period, the more inelastic)
2) Availability of spare capacity (the more spare capacity, the more elasticity)
3) The ease of storage (more ease, more elastic)
4) The ease of factor substitution (alternative uses)
5) Number of firms in the marker and the ease of entering the market
6) Time (long run - elastic)

Question 11

Determinants of Supply =

Answer 11

Productivity
Indirect taxes
Number of firms
Technology
Subsidy

Weather
Cost of production