Explaining Price Elasticity of Supply I A-Level & IB Economics

Summary

This video explains the concept of price elasticity of supply, which measures how responsive the quantity supplied of a good or service is to price changes. The script covers key factors affecting elasticity, such as production capacity, stocks of finished goods, and the ease of factor substitution. Real-world examples, such as baked beans and nuclear power plants, highlight how supply can be elastic or inelastic. The video also introduces multiple-choice questions to test understanding of the material. A quick revision of important concepts concludes the video, emphasizing the importance of this topic for exam preparation.

Takeaways

• 😀 Price elasticity of supply (PES) measures the responsiveness of supply to changes in price.
• 😀 The formula for PES is: Percentage Change in Quantity Supplied / Percentage Change in Price.
• 😀 When PES > 1, supply is elastic, meaning a small price change causes a large change in quantity supplied.
• 😀 When PES < 1, supply is inelastic, meaning quantity supplied is less responsive to price changes.
• 😀 A perfectly elastic supply (PES = ∞) can respond to price changes without affecting the price.
• 😀 A perfectly inelastic supply (PES = 0) means supply cannot change regardless of price fluctuations.
• 😀 Factors affecting PES include spare production capacity, stock levels, perishability, ease of factor substitution, and time frame for production.
• 😀 Elastic supply occurs when producers have spare capacity, stock, or can easily substitute resources.
• 😀 Inelastic supply happens when production faces constraints, long timelines, or challenges like perishability.
• 😀 Real-world examples of elastic supply include mass-produced goods like baked beans, while inelastic supply is seen in industries like nuclear power plants and housing.
• 😀 Over the long term, supply tends to be more elastic as firms can adjust production, unlike in the short term when constraints are more restrictive.

Q & A

What does the price elasticity of supply measure?

Price elasticity of supply measures the responsiveness of the quantity supplied of a good or service to a change in its price.

What is the formula for calculating price elasticity of supply?

The formula is the percentage change in the quantity supplied of good x divided by the percentage change in the price of good x.

What does a price elasticity of supply value of +2.0 indicate?

It indicates that a 1% increase in price leads to a 2% increase in the quantity supplied, meaning supply is responsive to price.

What is an example of an elastic supply?

A baked bean manufacturer can quickly respond to a demand increase by adding an extra shift to the production line, making the supply elastic.

Why is the supply of nuclear power highly inelastic in the short term?

The supply of nuclear power is inelastic in the short term due to the lengthy process of obtaining permissions, designing, building, and testing a new power plant.

Why is the supply of new housing often inelastic in the short term?

The supply of new housing is inelastic due to the time required for planning permissions, architectural designs, construction, and other factors like snagging.

What factors can make the supply of a product more elastic?

Factors that can make supply more elastic include spare production capacity, high stock levels, short production times, and the ease of factor substitution (such as labor and capital).

What makes the supply of avocado inelastic?

The supply of avocado is inelastic due to the time it takes to grow new trees and the perishable nature of the fruit, which makes it difficult to store and manage inventories.

What is the difference between a perfectly elastic supply curve and a perfectly inelastic supply curve?

A perfectly elastic supply curve means any change in demand can be met without any price change, while a perfectly inelastic supply curve means the supply remains fixed despite changes in price.

Why is supply more elastic in the long term than in the short term?

In the long term, supply is more elastic because firms can adjust their production levels by changing the scale of operations, entering the market, or acquiring new machinery and resources.