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Common exam mistakes on 2281 Price elasticity of supply. Learn what loses marks, then practise the topic with Examiner’s Ink.
When asked to explain the determinants of PES, do not just list them. You must explain how each factor influences a firm's ability to respond to a price change. For example, 'In the long run, a firm can build a new factory and train more staff, allowing it to significantly increase output in response to a higher price, making supply elastic.'
In exam questions on tax incidence, you must be able to draw and fully label a diagram showing the shift in the supply curve, the original and new equilibrium points, and clearly shade or identify the areas representing the consumer burden and the producer burden.
No, this is a common misconception. Slope measures the ratio of absolute changes (rise/run), whereas elasticity measures the ratio of percentage changes. A straight-line supply curve has a constant slope, but its elasticity changes along the curve unless it is vertical, horizontal, or passes through the origin.
Not necessarily. Elastic supply (high PES) simply means the firm is very responsive and can increase output quickly if the market price rises. This ability can lead to higher revenue in a rising market, but profit depends on the relationship between total revenue and total costs. A highly responsive firm might also have high production costs, which would limit its profitability.
No, the tax incidence depends on the relative elasticities of both supply and demand. The burden falls on the side of the market that is less elastic. For example, if supply is inelastic (PES < 1) but demand is even more inelastic (PED is closer to 0), the consumer will still bear the larger burden. You must always compare PES with PED to determine the final incidence.