Supply

• What does price elasticity of supply measure?

  Responsiveness of supply to price changes
• What is the formula for price elasticity of supply?

  PES = % change in supply / % change in price
• What does it mean if supply is elastic?

  Firms can increase supply quickly at low cost
• What is the numerical value for elastic supply?

  PES > 1
• What does it mean if supply is inelastic?

  Increasing supply is expensive and slow
• What is the numerical value for inelastic supply?

  PES < 1
• What is the PES for perfectly inelastic supply?

  PES = 0
• What happens to supply when demand changes for perfectly inelastic supply?

  Supply cannot be easily met
• What is the PES for perfectly elastic supply?

  PES = infinity

  
• What does perfectly elastic supply imply about price changes?

  Any quantity can be supplied without price change

  
• If the price of wheat increases by 15% and quantity supplied decreases by 20%, what is the PES?

  -1.33
• What does a negative PES value indicate about supply?

  Supply is relatively price inelastic
• What are the factors influencing price elasticity of supply (PES)?

  1. Time scale: Short run is more inelastic; long run is more elastic.
  2. Spare capacity: Full capacity limits supply increase; spare resources allow quick increase.
  3. Level of stocks: Storable goods allow easy supply increase; perishables limit supply.
  4. Substitutability of factors: Mobile resources increase elasticity; fixed resources decrease it.
  5. Barriers to entry: Higher barriers lead to more inelastic supply.