Price Elasticity of Supply (PES)

Comprehensive practice flashcards covering the definition, formula, magnitudes, determinants, and economic importance of Price Elasticity of Supply (PES).

What is the definition of Price elasticity of supply (PES)?

Price elasticity of supply (PES) measures the degree of responsiveness of the quantity supplied of a good to a change in its price, ceteris paribus.

What is the formula for calculating Price Elasticity of Supply (PES)?

$$PES=\frac{\text{Percentage change in Qty SS of good}}{\text{Percentage change in P of good}}$$

Why is the sign of PES always positive?

Due to the direct relationship between P and Qty SS, known as the law of supply.

When is supply considered price elastic in terms of magnitude?

When PES >1, meaning a change in P causes a more than proportionate change in Qty SS.

When is supply considered price inelastic in terms of magnitude?

When PES <1, meaning a change in P causes a less than proportionate change in Qty SS.

Define unitary price elastic supply.

Supply is unitary price elastic when $PES = 1$, meaning a change in price causes a proportional change in quantity supplied.

Define perfectly price elastic supply.

Supply is perfectly price elastic when $PES = \infty$, meaning a small change in price causes an infinite change in quantity supplied.

Define perfectly price inelastic supply.

Supply is perfectly price inelastic when $PES = 0$, meaning a change in price causes no change in quantity supplied.

What are the primary determinants of Price Elasticity of Supply?

1. Capacity, full vs spare

2. Ability to store inventories

3. Time period, for producers to react and for production of product

How does spare capacity affect the elasticity of quantity supplied?

The more spare capacity there is, the more price elastic the supply will be, as it is easier for the firm to respond with increased output when price increases.

How does the ability to store inventories impact PES?

The greater the availability and durability of unsold stocks and the easier they are to store, the more price elastic the supply will be.

What characterizes PES in the 'Very short run'?

In the very short run, all FOPs (Factors of Production) remain fixed, making it difficult to increase quantity supplied, resulting in $PES < 1$.

What characterizes PES in the 'Long run'?

In the long run, all FOPs can be varied, making it very easy to increase production, resulting in $PES > 1$.

Why do agricultural products typically have price inelastic supply?

They tend to be price inelastic because their gestation period is long, meaning producers cannot increase quantity supplied quickly even if prices increase.

What actions can firms take to increase their PES and improve response speed?

Firms can increase storage for stocks, invest in spare productive capacity, employ latest production equipment, and train workers in new skills to make them more mobile.

How does the level of PES affect the impact of a demand shift on market price?

The lower the price elasticity of supply, the greater the impact of a shift in demand on the market price of a product.

Why can the low PES of items like crude oil and electricity cause hardship for consumers?

Because supply is inelastic, an increase in demand leads to a significant increase in market price since producers cannot easily increase output, making goods unaffordable for low-income consumers.

Why are farmers' incomes often volatile according to the concept of PES?

Agricultural products have low PES because farmers cannot change supply quickly once crops are planted; thus, sudden changes in demand cause significant fluctuations in price and income.

How can governments intervene to stabilize prices affected by low PES in agriculture?

Governments may provide income support to farmers or import more crops when there are shortages to stabilize prices.