Chapter-12 Flashcards
Price elasticity of supply (11 cards)
What is price elasticity of supply (PES)?
Price elasticity of supply (PES) measures the responsiveness of the quantity supplied to a change in price.
What is the formula for calculating PES?
Percentage change in quantity supplied /
Percentage change in price
What is the formula for calculating percentage change in price?
Change in price
X 100 /
Original price
What is the formula for calculating percentage change in quantity supplied?
Change in quantity supplied
X 100 /
Original quantity supplied
What is elastic supply?
Elastic supply occurs when the quantity supplied changes by a greater percentage than the change in price.
What is inelastic supply?
Inelastic supply occurs when the quantity supplied changes by a smaller percentage than the change in price.
What are the main factors that determine the price elasticity of supply (PES)?
PES depends on production time, cost of adjusting supply, and storage feasibility. Faster production, lower adjustment costs, and storability make supply more elastic. Firms can quickly adjust supply by using spare capacity, reallocating resources, and drawing from stocks, leading to a greater percentage change in supply when price changes. In contrast, products with long production times, high adjustment costs, or limited storage have inelastic supply. Agricultural goods are often inelastic due to long growth periods and perishability, though regional supply may be elastic if transportable.
What is perfectly inelastic supply?
Perfectly inelastic supply occurs when a price change does not affect the quantity supplied.
What is perfectly elastic supply?
Perfectly elastic supply occurs when a change in price leads to a complete change in the quantity supplied.
What is unit PES?
Unit PES occurs when a change in price causes an equal percentage change in the quantity supplied.
What are the implications of PES for decision-making?
Elastic supply benefits consumers by ensuring a responsive supply to increased demand. When demand rises, prices increase, but with elastic supply, the quantity supplied increases by a greater percentage, leading to higher sales without a significant price rise. Producers prefer elastic supply as it allows them to adjust quickly and profitably to changes in demand. To promote higher output and consumption, governments can use subsidies effectively when supply is elastic. Additionally, governments often implement policies, such as labor market flexibility, to encourage production responsiveness.
