Price Elasticity of Supply (PES)

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Questions and Answers

Which of the following best describes price elasticity of supply?

  • The degree to which consumers alter their purchasing decisions based on income changes.
  • The ratio of change in price to change in consumer demand.
  • The relationship between production costs and the quantity of goods produced.
  • The sensitivity of the quantity supplied of a product to a change in its price. (correct)

What does it mean for a product to have a relatively elastic supply?

  • The quantity supplied does not change in response to price changes.
  • A significant change in price results in a small change in quantity supplied.
  • The percentage change in quantity supplied is less than the percentage change in price.
  • The percentage change in quantity supplied is greater than the percentage change in price. (correct)

A product has a price elasticity of supply (PES) of 1. What does this indicate?

  • The percentage change in price equals the percentage change in quantity supplied. (correct)
  • The supply is perfectly inelastic.
  • The quantity supplied is unresponsive to price changes.
  • The supply is perfectly elastic.

Which of the following characterizes a relatively inelastic supply?

<p>A large change in price leads to a small change in quantity supplied. (B)</p> Signup and view all the answers

If a 5% increase in the price of a good results in a 10% increase in the quantity supplied, what type of price elasticity of supply does it have?

<p>Relatively elastic. (C)</p> Signup and view all the answers

Which scenario would likely result in a higher price elasticity of supply for a particular product?

<p>The product is easy to produce with readily available resources. (C)</p> Signup and view all the answers

How does the shape of the supply curve differ between a product with high PES and a product with low PES?

<p>High PES has a flatter curve, while low PES has a steeper curve. (D)</p> Signup and view all the answers

What is a primary factor that makes the supply of a product relatively inelastic?

<p>Production requires scarce resources or complex processes. (D)</p> Signup and view all the answers

If the price of wheat increases by 8% and the quantity supplied increases by 8%, the price elasticity of supply is:

<p>1 (D)</p> Signup and view all the answers

Why might some industries struggle to adjust output quickly in response to price changes?

<p>Production constraints such as time, costs and resource availability. (A)</p> Signup and view all the answers

Which of the following is true regarding the relationship between price and supply?

<p>Price and supply vary directly. (A)</p> Signup and view all the answers

What is the formula for calculating Price Elasticity of Supply (PES)?

<p>$PES = (% Change in Quantity Supplied) / (% Change in Price)$ (A)</p> Signup and view all the answers

If the PES for a good is greater than 1, the supply is considered:

<p>Elastic (B)</p> Signup and view all the answers

For goods with a low PES, what is a likely outcome of a significant increase in demand?

<p>A small increase in quantity supplied with a large price change (B)</p> Signup and view all the answers

What does a PES of 0 indicate?

<p>Perfectly inelastic supply (D)</p> Signup and view all the answers

In which of the following scenarios is supply likely to be more price elastic?

<p>A mass-produced t-shirt (A)</p> Signup and view all the answers

What is the general shape of the supply curve for a good with unit elasticity?

<p>Linear and upward sloping (C)</p> Signup and view all the answers

Which factor does NOT directly affect the price elasticity of supply for a product?

<p>Consumer income levels (A)</p> Signup and view all the answers

How can businesses use the concept of price elasticity of supply?

<p>To determine how quickly they can adjust their supply levels in response to price fluctuations. (A)</p> Signup and view all the answers

If a 15% increase in price leads to no change in the quantity supplied, what is the PES?

<p>0 (C)</p> Signup and view all the answers

Which of the following products is most likely to have a low price elasticity of supply in the short term?

<p>Crude oil (C)</p> Signup and view all the answers

A company discovers that the PES of its product is very high. What implications does this have for the company's operations?

<p>They can quickly increase production in response to a price increase. (C)</p> Signup and view all the answers

Which of the following conditions would lead to a very low price elasticity of supply for apples?

<p>A sudden frost that destroys a large portion of the apple crop. (D)</p> Signup and view all the answers

If increasing the production of a good requires significant new investment in specialized equipment, the good's PES is likely to be:

<p>Low, because investment takes time and resources. (B)</p> Signup and view all the answers

What happens to the supply curve as PES increases?

<p>It becomes flatter (D)</p> Signup and view all the answers

Which of the following industries is MOST likely to have a very low price elasticity of supply?

<p>Agricultural products with a long growing season (D)</p> Signup and view all the answers

Suppose the government imposes a new excise tax on a product with a highly elastic supply. Who is likely to bear most of the economic burden of the tax?

<p>Producers will bear most of the burden (B)</p> Signup and view all the answers

How does the availability of substitute resources affect the price elasticity of supply?

<p>More substitutes lead to higher elasticity. (D)</p> Signup and view all the answers

Consider a scenario where a new technology significantly reduces the production time for smartphones. What would be the likely effect on the price elasticity of supply for smartphones?

<p>PES would increase. (B)</p> Signup and view all the answers

Which of the following is true regarding industries with high barriers to entry?

<p>They will generally have a more inelastic supply. (C)</p> Signup and view all the answers

A manufacturing firm is operating at full capacity. What does this imply about its price elasticity of supply in the short run?

<p>Its supply is perfectly inelastic. (C)</p> Signup and view all the answers

How does government regulation typically affect the price elasticity of supply?

<p>It can either increase or decrease the price elasticity of supply depending on the nature of the regulation. (B)</p> Signup and view all the answers

In a market with perfectly elastic supply, what will be the effect of an increase in demand?

<p>Price will remain constant, quantity will increase. (B)</p> Signup and view all the answers

If the costs of storing a commodity such as grain increase significantly, what is the likely impact on the price elasticity of supply?

<p>Elasticity will decrease. (C)</p> Signup and view all the answers

Assuming a downward-sloping demand curve, if a firm increases production and finds that its total revenue decreases, what does this suggest about the price elasticity of demand for its product?

<p>Demand is elastic (D)</p> Signup and view all the answers

What is a key difference in the factors influencing price elasticity of supply compared to price elasticity of demand?

<p>Supply elasticity is largely affected by production capabilities, while demand elasticity is more driven by consumer behavior. (C)</p> Signup and view all the answers

Why is the price elasticity of supply important for policymakers?

<p>It helps them understand and predict how markets will respond to changes in taxes, subsidies or regulations. (A)</p> Signup and view all the answers

If a firm has a perfectly inelastic supply curve, what does this imply for the firm's ability to increase production in response to market demand?

<p>The firm cannot increase production regardless of market demand. (B)</p> Signup and view all the answers

Flashcards

Price Elasticity of Supply (PES)

Measures the responsiveness of quantity supplied to a change in price.

Relatively Elastic Supply (High PES)

Supply changes by a larger percentage than the price change.

Unit Elastic Supply

The quantity supplied changes by the same proportion as the price.

Relatively Inelastic Supply (Low PES)

Supply changes by a smaller percentage than the price change.

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Quick Output Adjustment

Producers can quickly change the amount they produce when prices change.

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Easy Resource Reallocation

Resources can be moved easily from one industry to another based on demand.

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Struggling Output Adjustment

Producers find it hard to quickly change how much they produce due to problems like time, costs, or available resources.

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Study Notes

  • Price elasticity of supply (PES) assesses how much the quantity supplied of a product changes in response to a change in its price.
  • The quantity supplied of a good or service typically moves in the same direction as its price.
  • PES examines how businesses adjust their supply levels when prices fluctuate.

High PES

  • Supply is considered relatively elastic when the quantity supplied changes by a greater percentage than the price change.
  • For instance, a 10% price increase results in a 20% increase in the quantity supplied.
  • High PES is represented by a relatively flat supply curve.
  • Suppliers are generally willing and able to significantly increase supply in response to price increases.
  • Producers can quickly change their output levels when prices change.
  • Resources can be easily shifted to industries with higher demand.
  • PES is greater than 1.

Unit Elastic PES

  • Supply has unit elasticity when the quantity supplied changes by the same percentage as the price change.
  • For example, a 10% increase in price leads to a 10% increase in the quantity supplied.
  • PES = 1.

Low PES

  • Supply is considered relatively inelastic when the quantity supplied changes by a smaller percentage than the price change.
  • For example, a 10% rise in price results in only a 5% increase in the quantity supplied.
  • Low PES is represented by a relatively steep supply curve.
  • When the price increases by a certain percentage, suppliers are either unwilling or unable to increase supply by the same percentage.
  • Producers find it difficult to quickly adjust output due to constraints such as time, costs, or resource availability.
  • Resources tend to remain fixed in specific industries, even if demand changes.
  • PES is less than 1.

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