9708 · 2.3
Price elasticity of supply flashcards
Revision flashcards for Cambridge 9708 Price elasticity of supply (syllabus 2.3). Flip, recall, then mark a real past-paper question.
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What is the formula for Price Elasticity of Supply (PES)?
PES = (% Change in Quantity Supplied) / (% Change in Price)
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When is supply considered price elastic?
When PES > 1. This means the percentage change in quantity supplied is greater than the percentage change in price.
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When is supply considered price inelastic?
When 0 ≤ PES < 1. This means the percentage change in quantity supplied is less than the percentage change in price.
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Why is the value of PES typically positive?
Because of the Law of Supply, which states there is a direct, positive relationship between price and quantity supplied. As price rises, quantity supplied also rises.
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What is the main determinant of PES?
The time period. Supply is more price elastic in the long run because all factors of production are variable, allowing firms to fully adjust their production scale. In the short run, supply is more inelastic as at least one factor is fixed.
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How does spare capacity affect PES?
Firms with significant spare capacity (e.g., idle machinery, underemployed staff) can increase output quickly in response to a price rise, making their supply more price elastic.
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How does PES affect the incidence of an indirect tax?
The burden of an indirect tax falls more heavily on the side of the market with lower price elasticity. If supply is more inelastic than demand, producers bear a larger share of the tax.
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What does a PES value of 0 signify?
Perfectly inelastic supply. The quantity supplied does not change at all, regardless of the change in price. The supply curve is a vertical line.
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If supply is perfectly inelastic (PES = 0), who bears the full burden of an indirect tax?
The producer bears 100% of the tax burden. The supply curve is vertical, so quantity supplied cannot change, and the producer must absorb the entire tax to continue selling the same quantity.
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How does the intercept of a linear supply curve on a diagram indicate its elasticity?
If the curve intercepts the price (Y) axis, it is elastic (PES > 1). If it intercepts the quantity (X) axis, it is inelastic (PES < 1). If it passes through the origin, it has unitary elasticity (PES = 1).
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How does the ability to store stock affect PES?
Firms that can hold large inventories can respond to a price increase by releasing stock onto the market, making supply highly elastic in the short term.