AS Micro Multiple Choice: Price Elasticity of Supply

The price elasticity of supply for most goods and services is positive

This means that when there is an increase (outward shift) in demand for a product, we see an expansion along and up the supply curve for a producer. Higher demand provides an incentive to sell more and increase revenues and profits.

Supply will be elastic when PES > 1 i.e. a 15% increase in price brings about a 30% expansion of supply.

The diagram below shows two supply curves - one is price inelastic, the other is price elastic.

When supply cannot respond to a price/demand change, the supply curve is drawn as vertical and PES = 0

When supply can respond to any change in demand without a change in market price, the supply curve is drawn as horizontal and PES = infinity

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