chapter 12 - price elasticity of demand Flashcards
(25 cards)
What is Price Elasticity of Supply (PES)?
PES measures how responsive the quantity supplied is to a change in price
What is the formula for PES?
PES = % change in quantity supplied / % change in price
What does it mean if PES > 1?
Supply is price elastic (responsive to price changes)
What does it mean if PES < 1?
Supply is price inelastic (not very responsive to price changes)
What does it mean if PES = 1?
Supply is unit elastic – the % change in quantity supplied equals the % change in price
What does it mean if PES = 0?
Perfectly inelastic supply – quantity supplied does not change with price
What does it mean if PES is ∞ (infinite)?
Perfectly elastic supply – any drop in price causes supply to fall to zero
Is the PES value usually positive or negative?
Always positive, since price and quantity supplied move in the same direction
What type of supply curve does perfectly inelastic supply have?
A vertical supply curve
What type of supply curve does perfectly elastic supply have?
A horizontal supply curve
Name five main factors affecting PES.
Time, spare capacity, stock levels, mobility of factors of production, ability to switch production
How does time affect PES?
The longer the time period, the more elastic supply tends to be
How does spare capacity affect PES?
More spare capacity makes supply more elastic
How do stock levels affect PES?
If goods can be stored, supply is more elastic
How does factor mobility affect PES?
The more easily resources can move between industries, the more elastic supply is
How does ease of switching production affect PES?
If producers can switch production easily, supply is more elastic
What is a short-run supply response?
When only some inputs can be changed – usually less elastic
What is a long-run supply response?
When all inputs can be adjusted – usually more elastic
Why is agricultural supply often inelastic in the short term?
Because crops take time to grow and respond to price changes
Why might manufactured goods have a more elastic supply?
Because production can be increased more easily
How does PES affect the impact of demand changes on price?
More inelastic supply causes larger price changes when demand shifts
What happens to price if demand increases and PES is inelastic?
Price rises sharply
What happens to quantity if demand increases and PES is elastic?
Quantity supplied rises significantly with smaller price change
How can governments influence PES?
By investing in infrastructure, training, and improving production technology
