Price Elasticity of Supply Flashcards

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What is Price Elasticity of Supply (PES)?

It measures how much quantity supplied changes when the price changes.

How do you calculate PES?

PES = percentage change in quantity supplied ÷ percentage change in price.

What does it mean if PES is greater than 1?

Supply is elastic. Quantity supplied changes by a larger percentage than price.

What does it mean if PES is less than 1?

Supply is inelastic. Quantity supplied changes by a smaller percentage than price.

What does it mean if PES equals 1?

Supply is unit elastic. Quantity supplied changes by the same percentage as price.

What does PES = 0 show?

Perfectly inelastic supply. Quantity supplied does not change when price changes.

What does a very high PES (close to infinity) show?

Perfectly elastic supply. Firms will supply any amount at one price, but none if price falls.

Price rises by 10% and quantity supplied rises by 25%. What is PES and is supply elastic?

PES = 25% ÷ 10% = 2.5. Supply is elastic.

How does spare capacity in firms affect PES?

More spare capacity makes supply more elastic, as firms can raise output fast.

How do stock levels affect PES?

High stock levels make supply more elastic, as firms can sell from stock.

How does time affect PES?

In the short run supply is less elastic. In the long run supply is more elastic.

How do storage and perishability affect PES?

Goods that store well have more elastic supply. Perishable goods have inelastic supply.