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Unformatted text preview: AS Micro Revision: The Importance of Elasticity of Supply Price elasticity of supply measures the relationship between change in quantity supplied and a change in price . • When Pes > 1, then supply is price elastic • When Pes < 1, then supply is price inelastic • When Pes = 0, supply is perfectly inelastic • When Pes = infinity, supply is perfectly elastic following a change in demand Factors determining elasticity of supply 1. Spare production capacity – high Pes when businesses or the economy has plenty of spare capacity (also known as ‘productive slack’) e.g. when a business or economy is coming out of recession 2. Stocks of finished products and components – high level of stocks (inventories) means that supply can quickly be adjusted to meet changes in demand – this is important in commodity markets 3. The ease and cost of factor substitution- if both capital and labour resources are occupationally mobile then the elasticity of supply for a product is high because capital and labour can be swapped with little loss of efficiency or...
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This note was uploaded on 02/08/2012 for the course ECO 51844 taught by Professor Sabet during the Spring '11 term at FIU.
- Spring '11