Factors affecting Price Elasticity of Supply

Question 1

What is Price Elasticity of Supply?

Answer 1

Price elasticity of supply (PES) reveals how responsive the change in quantity supplied is to a change in price

Question 2

How do you measure PES(Price Elasticity of Supply)?

Answer 2

PES= %Change in Quantity Supplied / %Change in Price

Question 3

PES value of 0 is …

Answer 3

Perfectly Inelastic
The Quantity Supplied is completely unresponsive to a change in Price (e.g. fixed number of seats in a theatre)

Question 4

PES value of 0-1…

Answer 4

Relatively Inelastic
The %change in Quantity Supplied is less than proportional to the %change in Price (e.g agricultural products)

Question 5

PES value of 1-infinite…

Answer 5

The %change in Quantity Supplied is more than proportional to the %change in Price (e.g t-shirts)

Question 6

PES value of infinite

Answer 6

Perfectly Elastic
The %change in Quantity Supplied will fall to zero with any %change in Price.

Question 7

PES value of 1…

Answer 7

Unitary Elasticity

Question 8

What factors affect price elasticity of supply?

Answer 8

T-Time
R-Raw Materials
I-Inventory/stock
B-Barriers to Entry
E-Ease of Factor Substitution
S-Spare Capacity

Question 9

How does Time affect Price Elasticity of Supply?

Answer 9

Time period

-In the short run, producers may find it harder to respond to an increase in prices as it takes time to produce the product (e.g. avocados). However, in the long run they can change any of their factors of production so as to produce more

Question 10

How does Raw Materials affect Price Elasticity of Supply?

Answer 10

Raw materials - if there is good access/availability it is elastic

Question 11

How does Inventory/Stock affect Price Elasticity of Supply?

Answer 11

Ability to store goods

-If products can be easily -stored then PES will be higher (elastic) as producers can quickly increase supply (e.g. tinned food products). An inability to store products results in lower PES (inelastic)

Question 12

How does Barriers to Entry affect Price Elasticity of Supply?

Answer 12

Barriers to entry- low barriers to entry, more firms enter market, more supply

Question 13

How does Ease of Factor Substitution affect Price Elasticity of Supply?

Answer 13

Mobility of the factors of production

-If producers can quickly switch their resources between products, then the PES will be more elastic. E.g. If prices of hiking boots increase and shoe manufacturers can switch resources from producing trainers to boots, then boots will be price elastic in supply

Question 14

How does Spare Capacity affect Price Elasticity of Supply?

Answer 14

Spare capacity

-If prices increase for a product and there is a capacity to produce more in the factories that make those products, then supply will be elastic. If there is no spare capacity to increase production, then supply will be inelastic