Questions and Answers
What determines the ability of sellers to change the quantity of a good they produce?
What is the main characteristic of a perfectly elastic supply?
How is the price elasticity of supply computed?
Which of the following goods is likely to have an inelastic supply?
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What happens to the supply of a good in the long run?
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What is the relationship between the elasticity of supply and the slope of the supply curve?
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Why can good news for farming be bad news for farmers?
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Which of the following is an example of a digital good with an elastic supply?
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What is the purpose of elasticity in economics?
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Which type of supply has an elasticity of less than 1?
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Which of the following factors tends to make demand more elastic?
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What is price elasticity of demand a measure of?
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What is the characteristic of a production process that leads to unit elastic supply?
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How is the price elasticity of demand computed?
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Which of the following goods would tend to have a more inelastic demand?
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Which of the following is an example of a factor that affects the elasticity of supply?
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What is the result of a 22% increase in price on a good with unit elastic supply?
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What is the effect of a larger number of close substitutes on the elasticity of demand?
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Which type of supply has an elasticity of greater than 1?
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What is the effect of a longer time period on the elasticity of demand?
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What is the relationship between the elasticity of supply and the slope of the supply curve?
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Which of the following is a determinant of the price elasticity of demand?
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What is the effect of an increase in price on the revenue of a firm with elastic supply?
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What is the measure of the responsiveness of the quantity supplied to a change in price?
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Study Notes
Elasticity of Supply
- Elasticity of supply measures how much the quantity supplied of a good responds to a change in its price.
- A flexible production process and easily available resources lead to elastic supply.
Determinants of Elasticity of Supply
- Ability of sellers to change the amount of the good they produce affects elasticity of supply.
- Beach-front land has inelastic supply, while books, cars, or manufactured goods have elastic supply.
- Supply is more elastic in the long run.
Computing the Price Elasticity of Supply
- Price elasticity of supply is computed as the percentage change in quantity supplied divided by the percentage change in price.
Types of Elasticity of Supply
- Perfectly Elastic Supply: elasticity equals infinity, e.g., digital goods, software, or music downloads.
- Inelastic Supply: elasticity is less than 1, e.g., production requiring large investment in fixed assets or resources.
- Unit Elastic Supply: elasticity equals 1, e.g., production process with flexible resources.
- Elastic Supply: elasticity is greater than 1, e.g., production with easily available resources.
Elasticity and Its Applications
- Elasticity allows us to analyze supply and demand with greater precision.
- Elasticity is a measure of how much buyers and sellers respond to changes in market conditions.
The Elasticity of Demand
- Price elasticity of demand measures how much the quantity demanded of a good responds to a change in its price.
- Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price.
Determinants of Elasticity of Demand
- Availability of close substitutes affects demand elasticity.
- Necessities have inelastic demand, while luxuries have elastic demand.
- Definition of the market affects demand elasticity, e.g., 'gourmet coffee' vs 'all types of coffee'.
- Time horizon affects demand elasticity, e.g., price of petrol vs cars.
Computing the Price Elasticity of Demand
- Price elasticity of demand is computed as the percentage change in quantity demanded divided by the percentage change in price.
Factors Affecting Demand Elasticity
- Demand tends to be more elastic if there are many close substitutes.
- Demand tends to be more elastic if the good is a luxury.
- Demand tends to be more elastic if the market is broadly defined.
- Demand tends to be more elastic if the time period is longer.
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Description
This quiz covers the concept of price elasticity of supply, including perfectly elastic supply and how it affects production. It explains how the availability of resources and production flexibility impact supply.
