Study Notes
Price Elasticity of Supply (PES) measures how the quantity supplied of a product responds to a change in price, assuming other factors remain constant.
- Price Elasticity of Supply (PES) — a measure of the sensitivity of supply to price changes. Example: If PES is greater than 1, supply is elastic; if less than 1, supply is inelastic.
- Elastic Supply — when the quantity supplied is responsive to price changes. Example: PES value greater than 1.
- Inelastic Supply — when the quantity supplied is less responsive to price changes. Example: PES value less than 1.
- Time Scale — affects PES; supply is more elastic in the long run. Example: Producers can expand capacity over time.
- Spare Capacity — availability of resources affects elasticity. Example: Full capacity limits elasticity, spare resources increase it.
- Level of Stocks — affects how quickly supply can respond. Example: Storable goods increase elasticity, perishable goods decrease it.
- Substitutability of Factors — mobility of labor and capital affects PES. Example: Transferable skills increase elasticity.
- Barriers to Entry — affect market supply elasticity. Example: High barriers decrease elasticity, low barriers increase it.
Exam Tips
Key Definitions to Remember
- Price Elasticity of Supply (PES)
- Elastic Supply
- Inelastic Supply
Common Confusions
- Confusing elastic supply with inelastic supply
- Misunderstanding the impact of time scale on PES
Typical Exam Questions
- When is the supply curve for a car manufacturing firm most likely to be price elastic? Answer: When the firm has a large quantity of stock.
What Examiners Usually Test
- Understanding of how to calculate and interpret PES values
- Ability to differentiate between elastic and inelastic supply
- Knowledge of factors affecting PES