Chapter 11 : Consumer and producer surplus

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Created by
Fariha Rahman

Cards (16)

  • A supply curve shows the relationship between the price of a good and the quantity that producers are willing and able to supply
  • An upwardly sloping supply curve indicates that as the price of a good increases, the quantity that producers are willing and able to supply also increases
  • Producers are more likely to produce more of a good as its price increases because they can cover their costs and make a profit
  • A perfectly elastic supply curve is perfectly horizontal, indicating that the quantity supplied is infinitely responsive to changes in price
  • Perfectly elastic supply curves are used to model the supply of commodities, as the supply of commodities is typically very responsive to price changes
  • Price elasticity of supply (PES) measures the responsiveness of supply to a change in price
  • If PES is >1, supply is elastic, meaning firms can increase supply quickly at little cost
  • If PES is <1, supply is inelastic, making it expensive for firms to increase supply and taking a long time
  • A perfectly inelastic supply has PES = 0, meaning supply is fixed and cannot easily meet changes in demand
  • Supply is perfectly elastic when PES = infinity, allowing any quantity demanded to be met without changing price
  • Factors influencing PES include time scale, spare capacity, level of stocks, substitutability of factors, and barriers to entry to the market
  • In the short run, supply is more price inelastic because producers cannot quickly increase supply; in the long run, supply becomes more price elastic
  • If a firm is operating at full capacity, there is no space left to increase supply; spare resources allow for quick supply increases
  • Goods that can be stored easily have more elastic supply; perishable goods have more inelastic supply
  • Mobile factors like labor and capital lead to more price elastic supply as resources can be allocated where needed
  • Higher barriers to entry result in more price inelastic supply as it is difficult for new firms to enter and supply the market