Price Elasticity of Supply (PES) (Cambridge (CIE) IGCSE Economics)

In May 2017, the price of olive oil rose by more than 10%. This was caused by a drought in Greece, Italy, Spain and Tunisia, the major producing countries. Global supply was forecast to fall by 14% in 2017. Demand for olive oil fell in Europe, but rose in a number of other countries including Australia, Brazil and China. Some basic food items, including bread and rice, are taxed in some countries but are subsidised in other countries.

Explain why the concept of price elasticity of supply (PES) may be useful to a government in deciding whether to subsidise the production of a product

The price of dental treatment is increasing in most countries. For example, the average price of filling a tooth is $180 in the US. The number of dentists is increasing in the US. The largest proportion of the US labour force is employed in the tertiary sector. Price changes have an impact on the supply of products in the tertiary sector as well as in the primary and secondary sectors.

Explain two reasons why manufactured goods are usually in more price-elastic supply than agricultural goods.

Productivity has fallen recently in Finland particularly in the public sector. The country has a relatively high number of small firms. In recent years the price elasticity of demand and the price elasticity of supply of the products made by Finnish firms have changed.

Analyse how an increase in the price elasticity of demand (PED) and the price elasticity of supply (PES) of its products could benefit a firm.

Productivity has fallen recently in Finland particularly in the public sector. The country has a relatively high number of small firms. In recent years the price elasticity of demand and the price elasticity of supply of the products made by Finnish firms have changed.

Explain two determinants of price elasticity of supply

Since 1990, the population of Lithuania has fallen by one fifth because of net emigration. People usually leave in search of better living standards. In 2015, there were signs of improved macroeconomic performance as real GDP per head rose and unemployment fell. People expected that the decline in unemployment would affect the country’s inflation rate and might also turn the government’s budget deficit into a budget surplus.

Discuss whether or not the mobility of the factors of production determines how quickly firms can respond to changes in prices

There is a range of factors that influence the supply of economic goods, including natural disasters. Recently a series of earthquakes in one country destroyed buildings, including factories and offices. One factory that survived has since increased its scale of production. This firm has employed more factors of production and has experienced a fall in its average cost of production.

Discuss whether or not price elasticity of supply is the most important factor in understanding how producers respond to price changes