23. Supply: price elasticity of supply – determinants
1. What type of price elasticity of supply could be expected in each of the following cases?
1.1
Firms have plenty of spare capacity.
Inelastic
Elastic
No change
1.2
Stockpiles are very low and goods are difficult to store.
Inelastic
Elastic
No change
1.3
The price of the good increases.
Inelastic
Elastic
No change
1.4
Factors of production can easily & cheaply be transferred into production.
Inelastic
Elastic
No change
1.5
When a very short time period is under consideration.
Inelastic
Elastic
No change
2. Multiple choice
Question
2.1
2.2
2.3
2.4
2.5
The price elasticity of supply for
fresh strawberries is likely to be
Which of the following is most
likely to have a high price
elasticity of supply?
Natural gas takes a long time to
discover and tap into. Its price
elasticity of supply is likely to be
Which of the following is most
likely to have a low price
elasticity of supply?
The price of an agricultural good
is most prone to price volatility
when
Possible answers
Key
A
Price elastic because they’re easy to store for a long time.
B
Price inelastic in the short-run because they take time to
grow.
C
Likely to be negative.
A
Carrots, because there are many other substitute vegetables.
B
Car producers, at a time when falling demand pushes their
current production below their full capacity.
C
Gold, because it is very quick and easy to mine much more
over a short period of time.
A
Positive and inelastic in the short-run.
B
Positive and elastic in the short-run.
C
Negative and inelastic in the short-run.
A
Matches, because it takes up a small proportion of income.
B
Sports shoes, because of their branding.
C
Housing, because it takes time to transfer factors of
production over a short period of time.
A
Demand and supply are both price inelastic.
B
Demand and supply are both price elastic.
C
Demand is price elastic and supply price inelastic.
3. Data response - BP in $7bn deal to explore for oil in Brazil
Oil giant BP has announced It will pay US firm Devon Energy $7bn (£4.7bn) in cash to allow it to begin exploring off
the coast of Brazil as well as US deepwater sites in the Gulf of Mexico. Oil companies around the world are
exploring deeper and deeper areas around the world as technological developments make it possible to drill in areas
previously considered too expensive. Discoveries over the past decade have suggested that Brazil could be one of
the biggest oil producers in the world but most of the Brazilian oil fields are deep underwater, making the cost of
extraction high. Oil producers are attracted by the size of the fields, suggesting the potential for large profits, with
more than 100 billion barrels of oil that remain to be found. Source: BBC 11/3/2010
3.1 Discuss whether the price elasticity of supply for oil is likely to be inelastic in the short-run.
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3.2 Assess whether the price elasticity of supply for oil will increase over a longer time period.
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23. ANSWERS: Supply: price elasticity of supply – determinants
1.1 Elastic
1.2 Inelastic
1.3 No change
1.4 Elastic
1.5 Inelastic
2.1 B
2.2 B
2.3 A
2.4 C
2.5 A
3.1 Oil is inelastic in the short-run due to the time taken to increase investment into exploration and extraction of
oil and ultimately supply more oil. However it could be elastic if producers are operating below capacity or they have
stocks of oil that can be released onto the market.
3.2 In the long-run, oil is more elastic as deep-sea sites and other new oil fields are discovered or technology
develops to allow extraction. However oil is a finite resource and so as it is used up, the price elasticity of supply will
become lower.
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