1. PRICE ELASTICITY OF SUPPLY
REVIEW 2.7
PRICE ELASTICITY OF SUPPLY

2. PES is measured by the formula :
% change in quantity supplied
% change in price
With PES we are concerned with how quickly supply can be increased.
Supply increased quickly = Elastic
Supply not increased quickly = Inealstic

3. Factors which influence PES
1. SPARE CAPACITY: If a firm is not using all of its resources in the production of the good or service we say its working below its capacity. When there is spare capacity, supply is very responsive to change in price. Can use spare machines etc – ELASTIC
2. STOCKS: If a firm has a low stock level, it will not be able to respond quickly to changes in prices. In this case supply would be fairly inelastic. High stocks = ELASTIC
3. PRODUCTION LAGS: How long it takes to produce something.
Long production period = INELASTIC
Short production period = ELASTIC
4. SUBSTITUTABILTY OF FACTORS OF PRODUCTION: The more specialised the factors of production are the more inelastic the supply is.

4. 5. TIME PERIOD: In the short run supply will be fairly INELASTIC, but in the long term supply will be fairly ELASTIC.
PAST PAPER QUESTIONS
2012 – 2c i/ii – (2) / (2)
2013 – 1b ii – (2)

6. DETERMINATION OF PRICE IN COMPETITIVE MARKETS
REVIEW 2.8
DETERMINATION OF PRICE IN COMPETITIVE MARKETS

7. Price in a competitive market is determined by the forces of supply and demand.
P = Equilibrium Price
Q = Equilibrium Quantity
P1 (f) = Disequilibrium – Excess supply
P2 (c) = Disequilibrium – Excess demand

8. D1- D2 = An increase in demand caused by PASIFIC.
Increase in demand = Rise in price increase in quantity bought and sold.
Equilibrium = where demand and supply meet

9. S1-S2 = An increase in supply caused by PINTSWC.
Increase in supply – Fall in price , increase in quantity bought and sold.

10. PAST PAPER QUESTIONS Specimen Paper – Q12 (8) 2010 – Q2 (12 in total)
2011 – 1c (6 in total)
2013 – 1c (6)

11. Determination of price in competitive markets (2)
REVIEW 2.9
Determination of price in competitive markets (2)

12. Specific tax – a tax placed on a good or service which is a specific amount of money per unit bought, e.g. £2.00 tax on each bottle of wine.
This shifts the supply curve to the left, parallel to the original.
The vertical difference between the supply curve is the amount of tax per unit.
This causes the price to rise and the quantity sold to fall.
A = Company not passing on all tax increase

13. Ad valorem tax – A tax placed on a good or service which is a percentage of the price.
The higher the price- the higher the tax.
Causes the supply curve to shift to the left and is steeper in gradient than the original.

14. Subsidies
A subsidy is a payment given to a firm, usually by the government.
It may be to: lower price, increase supply, help unemployment, help firms be more efficient.
Diagram p.31
A subsidy will cause the supply to shift to the right.
Price will fall, quantity will rise
Vertical differences between the two is the amount of subsidy.
Questions:
Specimen paper –Q7 (6)
2013 – Q3C (6)