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Micro 4.1.3 Price determination in a competitive market > 4.1.3.4 Price elasticity of supply > Flashcards

4.1.3.4 Price elasticity of supply Flashcards

1
Q

Price Elasticity of Supply

A

The responsiveness of quantity supplied as a result of a change in price.

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2
Q

PES equation

A

% change in quantity supplied / % change in price

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3
Q

What is the difference between PED, YED, XED compared with PES

A

PES is about how the firms react and respond but PED, YED and XED are about how consumers behave.

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4
Q

If PES is 0

A

Supply is perfectly inelastic

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5
Q

If PES is less than 1

A

The good is price inelastic.

The percentage change in supply is less than the percentage change in price of the good.

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6
Q

If PES is 1

A

Unitary

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7
Q

If PES is more than 1

A

Price elastic

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8
Q

If PES is infinite

A

The good is perfectly elastic

An increase in price completely reduces all supply.

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9
Q

Factors affecting PES:

A

Length of Production Process
Availability of spare capacity Inventory and accumulation of stocks
Ease of switching between alternative methods of production
Factor substitution
Number of firms in the market
Barriers to entry
Time

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10
Q

Factors affecting PES: Length of Production Process

A

If the length is long then it takes more times to respond so is inelastic such as building houses.

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11
Q

Factors affecting PES: Availability of spare capacity

A

If firms have factors of production that are not being used e.g. machinery, workers
Easier to increase supply in response to a change in price
Long run = all factors of production are flexible.

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12
Q

Factors affecting PES: Inventory and accumulation of stocks

A

firms with stock or finished or partly finished goods will be able to respond relatively quickly to a price increase, thus supply will tend to be more price elastic

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13
Q

Factors affecting PES: Ease of switching between alternative methods of production

A

If factor inputs are flexible, it is easier for a firm to change production of its product e.g. from producing red to blue paint

However, if a firm has highly specialised equipment and employees, supply will tend to be relatively price inelastic

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14
Q

Factors affecting PES: Factor substitution

A

When labour or raw materials can be used for lots of things. They are substitutes for the same product. If the raw material has lots of substitutes then its easier to find so more elastic.

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15
Q

Factors affecting PES: Number of firms in the market

A

If only one firm is in the market then supply is more inelastic as only they have to respond

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16
Q

Factors affecting PES: Barriers to entry

A

if easy to enter more firms in market, so more firms can supply more so increase elasticity

17
Q

Factors affecting PES: Time:

A

In an immediate time frame no FOP are variable so inelastic as cannot respond straight away.

In the short term 1 FOP is variable, usually labour so PES is more elastic but still inelastic

In the long terms its elastic as all FOP are variable

18
Q

Should a firm be highly responsive?

A

Yes, because it makes the firm more competitive than its rivals and allows the firm to generate more revenue and profits.

19
Q

10 examples of improving PES

A
  • Creating spare capacity
  • Using the latest technology
  • Keeping sufficient stocks
  • Developing better storage systems
  • Prolonging the shelf life of products
  • Developing better distribution centres
  • Having flexible workers who can do a range of jobs
  • Provide training for workers
  • Locating production near to the market
  • Allowing inward migration of labour if there is a labour shortage
20
Q

what value will the price elasticity of supply always have

A

a positive value

21
Q

what is the value of price inelastic supply?

A

a value which is greater than zero and less than one

22
Q

what is the value of price elastic supply?

A

Greater than 1

23
Q

what is the value of unitary elastic supply?

A

One

24
Q

perfectly inesaltic supply value

A

Zero

25
Q

perfectly elastic supply value

A

Infinity

Micro 4.1.3 Price determination in a competitive market (6 decks)

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