Unit 2.6 - Elasticity of Supply

All 48 cards in this deck

Every term and definition, free to read. Hit study above to practice them as flashcards.

A condition where adjustments in price lead to only slight changes in the amount provided, with a responsiveness score below one.

Inelastic supply

A scenario where the supply response is smaller than the price change in percentage terms.

Price inelastic

A situation in which the quantity provided reacts significantly to changes in price, with a responsiveness greater than one.

Elastic supply

A situation where the supply of a good changes more than the price itself in percentage terms.

Price elastic

Supply can change infinitely in response to any price change.

Perfectly price elastic

Supply does not change at all in response to price changes.

Perfectly price inelastic

Supply exhibits a responsiveness of exactly one to price changes.

Unitary price elastic

The calculation that expresses responsiveness of quantity supplied to price changes through two percentage changes.

PES formula

State the formula: Example calculation

Example calculation If price rises by 10% and quantity supplied rises by 25%, PES is 2.5; if price rises by 10% and quantity supplied rises by 3%, PES is 0.3; if price rises by 10% and quantity supplied rises by 10%, PES is 1.

PES

Price elasticity of supply (PES) quantifies the responsiveness of quantity supplied to changes in price. It is calculated by dividing the percentage change in quantity supplied by the percentage change in price, helping to classify supply as elastic, inelastic, or unitary.

Unitary Elastic Supply

A degree of price elasticity of supply where the percentage change in quantity supplied is equal to the percentage change in price, indicating a balanced responsiveness in supply to price changes.

The difficulty in relocating factors of production from one location to another, often due to costs or availability issues.

geographical immobility

The difficulty in switching between different types of production resources.

Factor immobility

The difficulty in transferring production resources from one job type to another.

occupational immobility

The ease and cost associated with substituting different resources in the production process.

mobility of factors of production

The extent of inventory a firm can maintain to respond to market changes.

The ability to store

The extent to which a firm has excess productive capability that is not currently being utilized.

unused capacity

The level of stocks held by a firm.

inventory

State the formula: MC (MC)

MC = Change in total costs ÷ Change in output Marginal cost (MC) equals the change in total cost divided by the change in output and measures the extra cost of producing one more unit; MC is derived from variable costs since fixed costs do not change with output.

Inventory (stocks)

The levels of stored goods or raw materials that a firm holds, which can influence its ability to respond to price changes. High inventory levels often lead to greater price elasticity of supply, as firms can quickly adjust output based on market demand.

Law of diminishing marginal returns

A principle stating that as more units of a variable factor of production are added to a fixed factor, the additional output produced from each new unit will eventually decrease. This affects marginal costs and can limit a firm's willingness to supply at lower prices.

factor substitution

The ease and cost associated with substituting one factor of production for another, which influences the price elasticity of supply; more mobile factors lead to more elastic supply.

State the formula: Perfectly Price Elastic (PES)

If PES = ∞, then supply is perfectly price elastic. Perfectly Price Elastic

State the formula: Perfectly Price Inelastic (PES)

If PES = 0, then supply is perfectly price inelastic. Perfectly Price Inelastic

State the formula: Price Elastic Supply

If PES > 1 then supply is price elastic. Price Elastic Supply

State the formula: Price Inelastic Supply

If PES < 1 then supply is price inelastic. Price Inelastic Supply

State the formula: Unitary Price Elastic Supply

If PES = 1 then supply has unitary price elasticity. Unitary Price Elastic Supply

Spare capacity

The unused production capacity that firms have available to increase output quickly in response to price changes. High spare capacity typically leads to a more elastic supply, as firms can ramp up production without significant delays.

State the formula: Percentage change in price

%ΔP = (new price - original price) / (original price) × 100 Percentage change in price is calculated relative to the original price.

State the formula: Percentage change in quantity supplied

%ΔQ_s = (new quantity supplied - original quantity supplied) / (original quantity supplied) × 100 Percentage change in quantity supplied is calculated relative to the original quantity supplied.

A situation where quantity supplied does not alter regardless of price fluctuations.HL

Supply is perfectly inelastic

Supply exists at only one price, and any price change causes quantity supplied to drop to zero.HL

Perfectly elastic supply

The quantity supplied remains unchanged despite changes in price.HL

Perfectly inelastic supply

The scenario where the percentage change in produced quantity aligns perfectly with the price change percentage.HL

Supply is price unit elastic

The state in which any change in price results in supply falling to zero.HL

Supply is perfectly elastic

When the price elasticity of supply equals one, the percentage change in quantity supplied matches the percentage change in price.HL

Unit elastic supply

Substitution (of factors of production)HL

The ability to replace one factor of production with another in the production process. In manufacturing, capital can often be substituted easily, allowing for quicker adjustments in output, whereas primary production is more limited in this flexibility.

Time (determinant of PES)HL

The concept that the time available to adjust production affects price elasticity of supply. Primary commodities often have lower PES due to longer production times, while manufactured goods can typically be produced more quickly, resulting in higher PES.

perfectly elasticHL

Responsiveness so complete that the curve is horizontal: at one particular price any quantity is forthcoming, and at any other price the quantity offered falls to zero. The elasticity value is infinite.

substitutionHL

The ability to replace one factor of production with another, which is generally easier in manufacturing than in primary sectors, thus affecting the elasticity of supply.

unit elasticHL

A situation where the percentage change in quantity supplied is equal to the percentage change in price, indicated by a price elasticity of supply (PES) value of 1. This means that supply responds proportionately to price changes, making it an important concept in understanding how producers react to market conditions.

Firms struggle to adjust the quantity supplied quickly after a price change.

Price inelastic supply

The condition where firms can easily increase the quantity supplied without delay in response to a price increase.

Price elastic supply

The degree of responsiveness of quantity supplied of a product due to a change in its price.

Price elasticity of supply (PES)

State the formula: %ΔQs / %ΔP

%ΔQs / %ΔP Annotation of the PES formula using percentage change notation for quantity supplied and price.

State the formula: PES

PES = (%ΔQs) / (%ΔP) PES = percentage change in quantity supplied / percentage change in price PES > 1 PES = 1 PES = 0

Percentage change in price (%ΔP)

A measure of how much the price of a product changes, expressed as a percentage. This metric is essential for calculating the price elasticity of supply, as it helps determine the relationship between price changes and the corresponding changes in quantity supplied.

Percentage change in quantity supplied (%ΔQs)

A measure of how much the quantity supplied of a product changes in response to a change in its price, expressed as a percentage. It is a crucial component in calculating the price elasticity of supply, which indicates how responsive suppliers are to price changes.