2.3 Price elasticity of supply

Question 1

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

Answer 1

It is the responsiveness of a change in supply to a change in price
% change in quantity supplied / % change in price

Question 2

What is price ELASTIC supply?
What is the PES value?

Answer 2

This is when firms can increase supply quickly at little cost
PES is greater than 1

Question 3

What is price INELASTIC supply?
What is the PES value?

Answer 3

This is when an increase in supply will be expensive for firms and will take time
PES is less than 1

Question 4

What is perfectly INELASTIC supply?
What is the PES value?

Answer 4

This is when supply is fixed, so if there is a change in demand, it can’t be met easily
PES = 0

Question 5

What is perfectly ELASTIC supply?
What is the PES value?

Answer 5

This is when any quantity demanded can be met without changing price
PES = infinity

Question 6

What are the factors influencing PES? (Pneumonic)

Answer 6

PSSST
Production lag - The longer the production lag, the more inelastic
Stocks - the larger the stock, the more price elastic (perishability of product)
Spare capacity - More spare resources and space, more price elastic
Substitutability of FOP’s - if labour and capital are mobile, supply is more price elastic as resources can be allocated where xtra supply is needed
Time - In the short run, price inelastic, long run, price elastic