Topic: Price Elasticity of Supply

Q1

Define Price Elasticity of Supply (including the word: ‘responsiveness’)

The responsiveness of supply to a change in price.

Price Elasticity of Supply (PES) is calculated by:

% change in supply/% change in price

Q2

The price of Trendy.com handbags increases from £500 to £700 and as a result, supply rises from
100 units to 110. Calculate PES (show your working):

(110-100)/100=0.1

(700-500)/500=0.4

0.1/0.4=0.25

Is the supply for this type of handbag price elastic or inelastic?

Inelastic

Explain why: The coefficient is between 0 and 1 so supply increases by less relative to supply.

Plot the supply curve based on the information above:

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Topic: Price Elasticity of Supply

Q3

Cross out the wrong option:

- PES for a normal good should be negative/positive

- this is because there is an inverse/positive relationship between price and quantity supplied
- A steep/shallow supply curve suggests that the good is inelastic i.e. supply is relatively
unresponsive/responsive to a change in price
- For a good which is elastic in nature, the percentage change in quantity supplied is less/more
than the percentage change in price

Q4

PES can be determined by several factors. Fill in the gaps below using the words underneath to help
understand the key determinants:

• The time period

– The shorter time period, the more difficult firms find it to switch from making one
product to another.

• The existence of spare capacity

– The more capacity there is in the industry, the easier it should be to increase output if
price goes up. This makes supply more elastic.

• Ease of storing stocks

– If it is easy to store goods, then if price rises the firm can sell these stocks and so supply
is more elastic

• Length of the production period

– The quicker a good is to produce, the easier it will be to respond to a change in price.

quicker, spare, more, time, rises, elastic, shorter

Q5

Explain why PES in the short term for asparagus is price inelastic.

It is a good that has to be grown so there is a long time period for it to be produced.

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