If a supply curve is perfectly horizontal, what is the value of the price elasticity of supply? Explain why.
The correct answer and explanation is:
The value of the price elasticity of supply (PES) is infinite when the supply curve is perfectly horizontal. This is because the quantity supplied can change without any change in price.
In economic theory, the price elasticity of supply measures the responsiveness of the quantity supplied of a good to a change in its price. If a supply curve is perfectly horizontal, it indicates that for any increase or decrease in price, the quantity supplied will increase or decrease without any limit or restriction. In other words, producers are willing to supply any quantity at the prevailing price.
This situation typically occurs when the good in question is available in unlimited quantities or when production can be increased easily without incurring higher costs. In such cases, a small change in price would not affect the amount producers are willing to supply. The response is immediate and in any direction, depending on the price change.
To understand the logic behind the infinite elasticity, consider that the formula for calculating price elasticity of supply is: PES=% change in quantity supplied% change in pricePES = \frac{\% \text{ change in quantity supplied}}{\% \text{ change in price}}
For a perfectly horizontal supply curve, any change in price (denominator) leads to an infinitely large percentage change in the quantity supplied (numerator). Since the numerator can be any large number while the denominator is positive but fixed, the result is that the elasticity approaches infinity.
Thus, the supply is perfectly elastic, meaning that producers are completely responsive to price changes, but there is no limit to the quantity they will provide at that price. This is in contrast to a typical upward-sloping supply curve, where increases in price lead to increases in quantity supplied but at a decreasing rate.