1.2.5 Elasticity of Supply

Question 1

What is Price elasticity of supply (PES)?

Answer 1

The responsiveness of supply to a change in price of the good

Question 2

What is the formula for Price elasticity of supply (PES)?

Answer 2

% Change in quantity supplied / % Change in Price

Question 3

Unitary elastic PES is where…

Answer 3

PES=1

Question 4

Relatively elastic PES is where…

Answer 4

PES>1

Question 5

Relatively inelastic PES is where

Answer 5

PES<1

Question 6

Perfectly elastic PES is where….

Answer 6

PES=infinity

Question 7

Perfectly inelastic PES is where…

Answer 7

PES=0

Question 8

Which elasticity is S1?

Answer 8

Unitary elastic supply curve

Question 9

Which elasticity is S2?

Answer 9

Relatively elastic supply curve

Question 10

Which elasticity is S3?

Answer 10

Relatively inelastic supply

Question 11

What factors effect PES?

Answer 11

• Time
• Stocks
• Working bellow full capacity
• Availability of factors of production
• Ease of entry into the market
• Availability of substitutes

Question 12

Explain how time effects PES

Answer 12

• Will have an impact on the amount of a good that can be supplied at any price.
• In the immediate term, no matter how high the price is, a supplier can only sell the amount of product they have so supply is perfectly inelastic.
• In economics, the short term is the period of time when at least one factor of production is fixed and the long term is when all factors of production are variable.
• In the short term, they could sell more products but will still be restricted by the factors of production, meaning it will still be relatively inelastic.
• In the long term, they can increase production and all factors are variable and therefore the supply curve will be elastic.
• The longer the period of time the supplier has to make a change and increase production, the more elastic the curve will be.

Question 13

Explain how stocks affects PES

Answer 13

• If a business has a stockpile of goods, when the price goes up, they will
  simply decide to use up some or all of their stockpiles and therefore supply will be more elastic.

Question 14

Explain how working below full capacity affects PES

Answer 14

If a business is working below full capacity (e.g. they are producing 50 goods but could produce 100) and there is an increase in price, they can easily respond by producing to their full capacity so the supply curve will be more elastic

Question 15

Explain how availability of factors of production affects PES

Answer 15

For example, labour may need particular skills or training so cannot be instantly increased.

• If wages of a doctor rise by a large amount, it would still take years before there would be an increase in the number of doctors so it is inelastic.

Question 16

Explain how Ease of entry into the market affects PES

Answer 16

• Large costs of start-up equipment could make it difficult to increase supply, which makes it inelastic.
• Trade unions or professional associations can restrict entry.

Question 17

Explain how availability of substitutes affects PES

Answer 17

• If a good has a lot of producer substitutes, it will have high elasticity.
• One model of car is a substitute for another model of car as producers
  can easily switch between the two meaning suppliers can alter the pattern of production if price rises or falls so supply will change.