a) price elasticity of supply

a) understanding of price elasticity of supply

b) use formula to calculate price elasticity of supply

c) interpret numerical values of price elasticity of supply

d) factors that influence price elasticity of supply

the law of supply = when the price of a product increases, the quantity supplied increases

price elasticity of supply = how responsive the change in quantity supplied is to the change in price

PES = (%ΔQS) / (%ΔP)

• price elasticity of supply = percentage change in quantity supplied / percentage change in price

if PES = 0

• PES is perfectly inelastic

• the quantity supplied is completely unresponsive to any change in price

• gradient = 0 (perfectly vertical)

if 0 < PES < 1

• PES is relatively inelastic

  • a large change in the price causes a smaller change in the quantity supplied

  • gradient = constant and positive, gradient > 1

if PES = 1

• PES is unitary elastic

  • a change in the price causes an equal change in the quantity supplied

  • gradient = constant, positive, and 1

if PES > 1

• PES is relatively elastic

  • a large change in the price causes a large change in the quantity supplied

  • gradient = constant and positive, gradient < 1

if PES = infinite

• PES is perfectly elastic

  • the quantity supplied will fall to zero with any change in price

  • gradient = 0 (perfectly horizontal)

determinants of PES