Summary and Exam Tips for Price elasticity of supply
Price elasticity of supply is a subtopic of The price system and the microeconomy (AS level), which falls under the subject Economics in the Cambridge International A Levels curriculum. The Price Elasticity of Supply (PES) measures how the quantity supplied of a product responds to a change in price, assuming other factors remain constant. The formula for PES provides a numerical measure of this sensitivity. Generally, PES has a positive value due to the direct relationship between price and quantity supplied. If PES is greater than 1, supply is price elastic, meaning the quantity supplied is responsive to price changes. Conversely, if PES is less than 1, supply is price inelastic, indicating less responsiveness.
Several factors affect PES:
- Time Scale: In the short run, supply is more inelastic due to limited production capacity, while in the long run, it becomes more elastic as producers can adjust capacity.
- Spare Capacity: Full capacity limits elasticity, whereas spare resources enhance it.
- Level of Stocks: Storable goods increase elasticity, while perishable goods decrease it.
- Substitutability of Factors: Mobile labor and capital increase elasticity.
- Barriers to Entry: High barriers increase inelasticity, while low barriers enhance elasticity.
Exam Tips
- Understand Key Concepts: Make sure you grasp the difference between elastic and inelastic supply and how PES values reflect these concepts.
- Memorize the Formula: Be comfortable with the PES formula and practice calculating it with different scenarios.
- Factors Affecting PES: Familiarize yourself with the factors that influence PES, such as time scale, spare capacity, and barriers to entry.
- Application in Real-World Scenarios: Think about how PES applies to different industries and products, such as storable vs. perishable goods.
- Practice Exam Questions: Work through exam-style questions to test your understanding and application of PES concepts.
