Price Elasticity of Supply Flashcards
(16 cards)
What does PES stand for?
Price Elasticity of Supply – measures how much quantity supplied responds to a change in price.
PES Formula?
% change in Q.S divided by % change in price.
What does PES > 1 mean?
Price elastic supply – quantity supplied changes more than the price change (responsive supply).
What does PES < 1 mean?
Price inelastic supply – quantity supplied changes less than the price change (less responsive).
What does PES = 1 mean?
Unitary elastic supply – quantity supplied changes exactly in proportion to the price.
What does PES = 0 mean?
Perfectly inelastic supply – quantity supplied does not change regardless of price.
What does PES = ∞ (infinity) mean?
Perfectly elastic supply – any price change leads to an infinite change in quantity supplied.
How do you calculate % change?
new value- original value x 100
original value
What does a steep supply curve indicate?
Price inelastic supply – little response in supply to price changes. (PES < 1)
What does a flatter supply curve indicate?
Price elastic supply – strong response in supply to price changes. (PES > 1)
What determines PES? (Use SPSSST)
Stock levels (can you store the product?)
Production time (can you increase output quickly?)
Spare capacity (is there room to produce more?)
Substitutability of FOPs (can you switch inputs easily?)
State of the economy
Time period (more elastic in long run)
Production Lag
The longer the production lag (time it takes to make a good/service), the more price inelastic supply is.
The shorter the lag, the more responsive production can be → more price elastic.
Stocks (Inventories)
Firms with large stockpiles can quickly meet increased demand → more elastic supply.
Low or no stocks mean firms can’t respond as fast → inelastic supply.
Spare Capacity
More spare production capacity (unused machinery/workers) = easier to increase output → elastic supply.
Limited spare capacity → inelastic supply.
Substitutability of Factors of Production (FOPs)
If factors (e.g., labor, machinery) can easily switch between products → elastic supply.
If not (e.g., specialized machinery or skills), supply is inelastic.
Time
Short Run – supply is inelastic (limited flexibility).
Long Run – supply is elastic, as firms can invest in more resources or change scale of production.
