Topic 3.4 Price Elasticity of Supply

Question 1

Price elasticity of supply

Answer 1

The price elasticity of supply is the responsiveness of a change in supply to a change in price

Question 2

PES formula

Answer 2

PES = % change in quantity supplied/% change in price

Question 3

PES sign (+ve or -ve)

Answer 3

PES will always be positive due to the law of supply

Question 4

PES > 1

Answer 4

Price elastic. The curve is less steep. This means that quantity supply changes with a greater proportion then price. This means that producers can respond quickly to changes in price

Question 5

0 < PES < 1

Answer 5

Price inelastic. This curve is more steep. This means that the quantity supply changes with a lesser proportion then price. This means that producers can’t respond quickly to changes in price.

Question 6

PES = 0

Answer 6

Perfectly price inelastic. Vertical line. The Quantity supplied remains fixed regardless of changes in price. Firms cannot do anything with a change in price

Question 7

PES = ∞

Answer 7

Perfectly price elastic. Horizontal line.

Question 8

PES = 1

Answer 8

Unitary price elastic. The quantity supplied changes proportionally to a change in price. Straight line through the origin

Question 9

Factors that affect PES

Answer 9

PSSST
P - Production lag (when product demanded, how long it takes for supply to respond, if high production lag then price inelastic)
S - Stocks (if you have lots of stock, you can quickly sell it therefore price elastic )
S - Spare Capacity (if you have spare capacity, you can employ more of it thus price elastic)
S - Substitutability of Factors of Production (firms realistically produce more than one product - if you can switch to producing another quickly then price elastic)
T - Time (we assume in the short run it’s price inelastic as 1+ FOP is fixed thus hard to respond wheras in the long run price elastic as all FOP variable)