Price Elasticity of Supply Flashcards
What is price elasticity of supply? What does it record specifically?
The responsiveness of the quantity supplied of a good or service by producers to a change in the good or service’s prices. Records whether there is a small or large effect change in quantity supplied.
What can producers do if supply is elastic? What happens to supply if supply of a product is inelastic?
Producers can increase output without a rise in cost or a time delay.
Producers will struggle to change production in a given time if a product is inelastic.
Price Elastic Supply Explanation
Sellers are relatively sensitive to a price change. Law of Supply is strong. >1 e.g. Manufactured goods _ Fast to produce.
Price Inelastic Supply Explanation
Sellers are not sensitive to a price change. Law of supply is weak. <1 e.g. Agricultural goods - Slow to produce.
Perfectly Price Inelastic Supply Explanation
A change in price has no effect on quantity supplied. Law of supply does not apply. 0 e.g. Rare or Valuable/1:1 goods
Factors that determine price elasticity of supply
- Ability to store inventory
- Nature of industry
- Time
What is the time factor?
If the producer can respond quickly to a price change, then supply will be price elastic. If inventories are low, this may be hard to do. As time increases the supply of goods tend to become more elastic due to the increase in factors of production.
What is nature of industry factor?
The supply of agricultural products is quite inelastic, while the supply of manufactured goods is usually more elastic. Agricultural products take a long time to produce, they cannot respond quickly to price changes. Manufactured goods on the other hand are relatively easy to produce.
What is the ability to store inventory factor?
Inventories refer to stocks that a producer keeps stored for future sales. If a producer has the ability to store its goods, then it can respond fairly quickly to a change in demand and so supply would be elastic.
