What does price elasticity of supply measure? how responsive price is to a change in quantity demanded how responsive supply is to a change in price how responsive price is to a change in quantity supplied how responsive quantity supplied is to a change in price
If the price elasticity of supply for steel is 0.97, then the price elasticity of supply for steel is Operfectly elastic. Orelatively elastic. unit elastic. perfectly inelastic. relatively inelastic.
The Correct Answer and Explanation is :
Answer:
- What does price elasticity of supply measure?
Price elasticity of supply measures how responsive quantity supplied is to a change in price. - If the price elasticity of supply for steel is 0.97, then the price elasticity of supply for steel is:
Relatively inelastic.
Explanation:
1. Price Elasticity of Supply (PES):
PES quantifies the responsiveness of the quantity of a good supplied to a change in its price. The formula for calculating PES is:
[
PES = \frac{\text{Percentage change in quantity supplied}}{\text{Percentage change in price}}
]
- If PES > 1, supply is elastic (quantity supplied responds significantly to price changes).
- If PES < 1, supply is inelastic (quantity supplied responds less proportionately to price changes).
- If PES = 1, supply is unit elastic (quantity supplied changes proportionately to price changes).
2. Why 0.97 is relatively inelastic:
A PES value of 0.97 is close to but less than 1. This means that a 1% increase in price leads to less than a 1% increase in the quantity of steel supplied. Since the response is not proportional, the supply of steel is relatively inelastic.
3. Factors influencing steel’s PES:
- Production Time: Steel production involves long processes, so it is difficult to adjust supply quickly.
- Availability of Inputs: Steel production depends on raw materials like iron ore, which may have limited availability.
- Capacity Constraints: If producers operate near full capacity, increasing supply further is challenging.
4. Practical Implications:
Inelastic supply means price changes significantly affect revenue. For instance, if demand for steel increases suddenly, prices may rise substantially because producers cannot immediately increase supply. Similarly, a drop in price may not lead to a significant decrease in supply in the short run.
Understanding PES helps policymakers and businesses predict how markets react to price changes and plan accordingly.