Price elasticity of supply (Pack 7)

• What is the formula for price elasticity of supply (PES)?

  PES = % change in quantity supplied / % change in price
• What are four factors affecting price elasticity of supply (PES)?

  1. Time period for adjustment (Short run means more price inelastic supply as less time to respond)
  2. Availability of stocks (More stocks means more price elastic supply)
  3. Spare capacity (More spare capacity means more price elastic supply)
  4. How easy it is to enter an industry (High barriers to entry e.g. High start up costs and specialist knowledge means more price inelastic supply)
• What does a PES figure of 0 indicate?

  Supply is perfectly inelastic; A horizontal Iine representing fixed supply
• What does a PES of infinity mean?

  Supply is perfectly elastic; A vertical line representing infinite supply
• What does a PES of 0.4 indicate?

  Supply is inelastic; For every 1% price increase, there’s a 0.4% increase in quantity supplied
• What does a PES of 1 indicate?

  Supply is unit elastic; The change in price equals the change in quantity supplied
• What does a PES of 2 indicate?

  Supply is elastic; For every 1% price increase, there’s a 2% increase in quantity supplied
• How can a rise in demand affect price based on PES?

  • Large increase in price with inelastic supply
  • Small increase in price with elastic supply
• What is Price Elasticity of Supply (PES)?

  The responsiveness of quantity supplied to a change in price.
• How could a business make supply more price elastic and how would they benefit?

  • Hire staff on zero hour contracts and increase their hours when need
  • Freezing a product
  • It allows them to respond quickly to price changes