Cambridge International as and a level Economics Ebook

 PES and
Description
A
0
/ 10% decrease
=
0 
Perfectly 
inelastic
B
6% decrease
/ 10% decrease
=
+
0.6
Relatively 
inelastic
C
10% decrease / 10% decrease
=
+
1.0
Unitary 
elasticity
D
20% increase
/ 10% increase
=
+
2.0
Relatively 
elastic
E
Firms are not prepared to 
supply any at a price below
$10 but will supply as much as 
they can at $10 (or above!)
=
+
∞ Perfectly 
elastic
Figure 2.10 
Five diff erent supply curves
0
Price (US$)
Quantity supplied
80
A
10
9
90
B
C
D
E
94 100
53
Chapter 2: The price system and the microeconomy 

---

Price
Q
1
Q
2
Q
P
2
P
1
P
S
i
S
e
Quantity
D
2
D
Figure 2.11 
Supply curves with diff erent elasticities
Business relevance of price elasticity 
of supply
Knowledge of the PES is important since it can go a long 
way to explaining the speed and ease with which businesses 
can respond to changed market conditions.
 Figure 2.11
shows two supply curves. S
e
is relatively price elastic; S
i
is relatively price inelastic. If there is an increase in price 
for the product, the business with the supply curve S
e 
can 
respond more quickly than the one with the supply curve S
i
.
Why is this? If both businesses are manufacturers 
then it relates to the ease with which they can increase 
production. Where a business has spare capacity then 
it can quickly hire more factors of production (labour 
especially) to meet the increased demand. For a business 
that is at full capacity, it is necessary to expand its 
scale of operations and this can take time. It can also 
take time where a business has to diversify into a new