Micro 7 - Price Elasticity of Supply

Question 1

Define Price Elasticity of Supply

Answer 1

Price elasticity of supply is a measure of how the quantity supplied of a good responds to a change in its price

Question 2

What does PES mean?

Answer 2

Price Elasticity of Supply

Question 3

What is the formula for calculating PES?

Answer 3

Percentage change in quantity supplied / Percentage change in price

Question 4

Does PES have any units?

Answer 4

PES does not have any units, its not a percentage

Question 5

Why is PES generally positive?

Answer 5

PES is generally positive since the higher the price the greater the supply

Question 6

What type of PES is indicated by a PES value of greater than 1

Answer 6

Relatively elastic supply

Question 7

What would the PES value of a good be if supply for the good is relatively elastic?

Answer 7

Greater than 1

Question 8

What does it mean if the supply for a good is relatively elastic?

Answer 8

A percentage change in price will cause a larger percentage change in quantity supplied

Question 9

What is the relationship between how high the PES value is and how elastic supply is?

Answer 9

The higher the value of the PES figure the more elastic supply is for the good

Question 10

What does a PES of 8.5 mean?

Answer 10

A 1% change in price leads to a 8.5% change in supply

Question 11

What type of PES is indicated by a PES value of ± infinity?

Answer 11

There is perfectly elastic supply

Question 12

What PES value indicates perfectly elastic supply?

Answer 12

± infinity

Question 13

What does it mean if a product has perfectly elastic supply?

Answer 13

A fall in price of a product means that the quantity supplied will be reduced to zero

Question 14

What type of PES is indicated by a PES figure of between 0 and 1?

Answer 14

Relatively inelastic supply

Question 15

What type of PES figure indicates relatively inelastic supply?

Answer 15

A PES figure of between 0 and 1

Question 16

What does relatively inelastic supply mean?

Answer 16

A percentage change in price will cause a smaller percentage change in quantity supplied

Question 17

What is the relationship between the size of the PES value and how inelastic supply is?

Answer 17

The smaller the value of PES the more inelastic supply is

Question 18

What does a PES figure of 0.5 mean?

Answer 18

For every 1% change in price there is a 0.5% change in quantity supplied

Question 19

What type of supply does a PES of 0 indicate?

Answer 19

Perfectly inelastic supply

Question 20

What PES figure indicates perfectly inelastic supply?

Answer 20

A PES figure of 0

Question 21

What does perfectly inelastic supply mean?

Answer 21

A change in price will have no effect on the quantity supplied. At any price the quantity supplied will be the same

Question 22

What will a supply curve representing relatively elastic supply look like?

Answer 22

Relatively flat

Question 23

What does a supply curve representing perfectly elastic supply look like?

Answer 23

A horizontal line

Question 24

What does a supply curve representing relatively inelastic supply look like?

Answer 24

Relatively steep

Question 25

What does a supply curve representing perfectly inelastic supply look like?

Answer 25

A vertical line

Question 26

What does a supply curve representing unit elasticity of supply look like?

Answer 26

A straight line through the origin

Question 27

What type of supply does a PES value of 1 represent?

Answer 27

Unit elasticity of supply

Question 28

What PES value represents unit elasticity of supply?

Answer 28

A PES value of 1

Question 29

What does it mean if a good has unit elasticity of supply?

Answer 29

A good has unit elasticity of supply if the percentage change in quantity supplied is equal to the percentage change in price

Question 30

Is a high or a low PES important to firms?

Answer 30

A high PES

Question 31

Why is a high PES important to firms?

Answer 31

Firms aim to respond quickly to changes in price and demand. To do so they need to make their supply as elastic as possible Measures undertaken to improve the elasticity of supply include flexible working patterns, using the latest technology and having spare production capacity.

Question 32

Is supply price elastic or inelastic in the short run?

Answer 32

Price inelastic

Question 33

Why is supply likely to be more price inelastic in the short run compared to the long run?

Answer 33

Over short periods of time firms can find it difficult to switch production from one good to another therefore supply is likely to be more price inelastic in the short run

Question 34

What is the short run?

Answer 34

The short run is the time period when a firm's capacity is fixed, and at least one factor of production is fixed.

Question 35

Which factor of production is normally fixed in the short run?

Answer 35

Capital is often the factor of production that is fixed in the short run. A firm can recruit more workers and buy more materials but it takes time to build additional production facilities. This means that it can be difficult to increase production in the short run so supply in the short run is inelastic.

Question 36

What is the long run?

Answer 36

In the long run all the factors of production are variable so in the long run a firm is able to increase its capacity. This means that supply is more elastic in the long run because firms have longer to react to changes in price and demand

Question 37

What does the distinction between the long run and short run vary with?

Answer 37

The distinction between the long run and short run varies with different industries. For example the long run for a firm that makes sandwiches will be a shorter time than that of a firm which builds ships - to change production levels in ship building requires more capital equipment and more planning. Because ships take longer produce than sandwiches the supply of ships is more inelastic

Question 38

What factors affect PES?

Answer 38

- Availability of stocks of the product (Stockpiling) - Spare capacity - Barriers to entry - Time period being considered - If the good is perishable or not - The state of the economy

Question 39

During periods of unemployment does supply tend to be more elastic or inelastic?

Answer 39

During periods of unemployment supply tends to be more elastic as its easy to attract new workers if a firm wishes to expand

Question 40

Do perishable goods have an elastic or inelastic supply?

Answer 40

Perishable goods have an inelastic supply as they cannot be stored for very long

Question 41

Do firms with a high stock level have elastic or inelastic supply?

Answer 41

Firms with high stock levels often have elastic supply as they are able to increase supply quickly if they want to

Question 42

Do industries with more mobile factors of production have elastic or inelastic supply?

Answer 42

Industries with more mobile factors of production tend to have more elastic supply. For example industries that employ lots of unskilled workers may find it easy to increase their labour force