2281 · 2.8
Price elasticity of supply flashcards
Revision flashcards for Cambridge 2281 Price elasticity of supply (syllabus 2.8). 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 PES < 1. This means the percentage change in quantity supplied is less than the percentage change in price. The supply curve is relatively steep.
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Why is supply typically more elastic in the long run?
In the long run, all factors of production are variable. Firms can build new factories, install more machinery, and train new staff, allowing for a much larger response to a price change.
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How does the availability of spare capacity affect PES?
If a firm has significant spare capacity (e.g., idle machines, part-time workers who want more hours), it can increase output quickly in response to a price rise, making supply more price elastic.
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What does a PES value of 0 signify?
PES = 0 means supply is perfectly inelastic. Quantity supplied does not change at all, regardless of the price. This is represented by a vertical supply curve (e.g., the supply of seats in a stadium).
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How does PES influence the incidence of an indirect tax?
The burden of an indirect tax falls more heavily on the side of the market with the lower price elasticity. If supply is more inelastic than demand, producers will bear a larger share of the tax.
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If a linear supply curve cuts the vertical (price) axis, what is its elasticity?
The supply is price elastic (PES > 1) at all points along the curve. This is because the percentage change in quantity will always be greater than the percentage change in price.
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Why is the value of PES always 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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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 ability to store stock affect PES?
If a good can be easily and cheaply stored (e.g., tinned food), firms can respond to a price rise by releasing stock onto the market. This makes supply more price elastic in the short term.