EConomics IB HL - unit 1 - Microeconomics - Price Elasticity

How might knowing the YED implicate economically less developed countries?

Low YEDs for primary products, which sometimes make up the bulk of exports of poor countries, in combination with high YED’s for manufacturing products forming the bulk of exports for developed countries can affect the value of exports and imports dwhich can then form a barrier to their further development due to deteriorating terms of trade.

What is PES?

PES - stands for the price elasticity of supply and it is the responsiveness of Q supplied to changes in P.

What is the equation to calculate PES?

percentage change in Q

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percentage change in price

Suppose the P of pizzas increase from $4 to $6 and the quantity supplied increases from 2,000 to 2,400. Calculate the PES for pizzas.

percentage change in Q

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percentage change in price

so (400/2000)/(2/4) = 1600/4000 = 0.4

What is meant by Price elastic supply?

when PES > 1 = percentage change in Q supplied is greater than the percentage change in P. The change in Q is proportionately larger than the change in P

What is meant by price inelastic supply?

if PES is 0<PES< 1 = the percentage change in Q supplied is smaller than the percentage change in P. The change in Q is proportionately smaller than the change in P

On a supply curve which one is steep and which is flatter out of inelastic and elastic?

the elastic is flatter and the inelastic is steeper.

What is meant by Perfectly elastic supply?

This is when the percentage change in Q supplied from a change in P is infinitely large.

What shape is a perfectly elastic supply curve?

it is a horizontal S curve.

What is meant by perfectly inelastic supply

This is when the percentage change in Q supplied is zero. No matter how high P rises, Q supplied does not respond.

What shape is a perfectly inelastic supply curve?

It is a vertical S curve

What is meant by unit elastic supply

This is when PES = 1 when the percentage change in Q supplied is equal to the percentage change in P.

What is the shape of a unit elastic supply curve?

It is a diagonal S curve that cuts the origin

How is time a determinant of PES?

The longer the time period a producer has to respond to price changes, the more elastic the supply. In a short period of time the producer may be unable to obtain all the necessary resources to increase output to meet the price increase but as more time passes it becomes easier to do so so the responsiveness increases.

Why is the mobility of factors of production a determinant of PES?

The easier and quicker it is to move resources from one type of production to another means there is more elasticity of supply

Why is the unused capacity of firms a determinant of PES?

if firms have machinery, equipment or labour that is not being fully used then it is easier to expand production in the event that price increases. Firms are simply making use of the idle resources and so supply is more elastic

How is the ability to store stocks a determinant of PES?

IF a firm has more stocks and can store them easily then in the event of a price increase it is more likely to have available stock that can be sold in the market. Hence more elastic supply

How can PES be applied for primary commodities?

Most primary commodities have low PES(inelastic supply) mainly because they need more time to be produced and in some cases mined. Agricultural products need to be grown. Forestry has lots of time needed to grow trees

In case of an Indirect tax who would have a higher tax burden when PES < PED.

It would be the producers

In case of an Indirect tax who would have a higher tax burden when PES > PED.

The consumer would have a higher tax burden