Study Notes
Price elasticity of supply (PES) measures how responsive the quantity supplied of a good or service is to a change in its price. It helps us understand whether producers can quickly adjust their supply in response to market price changes.
- Price Elasticity of Supply (PES) — the responsiveness of quantity supplied to a change in price.
Example: If the price of a product increases, PES indicates how much more of the product suppliers will provide. - Perfectly Elastic Supply — when any price change leads to an infinite change in quantity supplied.
Example: PES = ∞ - Perfectly Inelastic Supply — when quantity supplied does not change regardless of price changes.
Example: PES = 0 - Price Elastic Supply — when quantity supplied is very responsive to price changes.
Example: PES > 1 - Price Inelastic Supply — when quantity supplied is not very responsive to price changes.
Example: PES < 1 - Unitary Elastic Supply — when quantity supplied changes by the same percentage as the price change.
Example: PES = 1 - Factors Influencing PES — include time period, availability of stock, mobility of factors of production, legal constraints, and capacity.
Example: More spare capacity leads to more elastic supply.
Exam Tips
Key Definitions to Remember
- Price Elasticity of Supply (PES)
- Perfectly Elastic Supply
- Perfectly Inelastic Supply
- Price Elastic Supply
- Price Inelastic Supply
- Unitary Elastic Supply
Common Confusions
- Confusing price elasticity of supply with price elasticity of demand
- Misunderstanding the impact of time period on PES
Typical Exam Questions
- What is price elasticity of supply? It measures the responsiveness of quantity supplied to a change in price.
- How does spare capacity affect PES? More spare capacity makes supply more elastic.
- What is the difference between short run and long run in terms of PES? In the short run, at least one factor of production is fixed, while in the long run, all factors are variable.
What Examiners Usually Test
- Ability to calculate and interpret PES values
- Understanding of factors affecting PES
- Distinction between short run and long run impacts on PES