1.2.5 Elasticity of supply Quiz: Pearson Edexcel Economics A, Unit 1

The 20 questions

1. What is price elasticity of supply (PES)?

   • The change in quantity supplied resulting from a one-pound change in the cost of a factor of production.
   • The responsiveness of quantity demanded to a change in consumer income, measured in pounds per unit of output.
   • Responsiveness of quantity supplied to price: the percentage change in quantity supplied divided by the percentage change in price.
   • The change in total revenue earned by producers following a change in the number of units they sell.

2. The price of a good rises by 20 per cent and quantity supplied rises by 30 per cent. What is the price elasticity of supply?

   • 0.67, so supply is relatively inelastic.
   • 6, so supply is perfectly elastic over this range.
   • 1.5, so supply is relatively elastic.
   • 0.5, so supply is perfectly inelastic over this range.

3. The price of a good rises by 10 per cent and quantity supplied rises by 2 per cent. What is the price elasticity of supply?

   • 0.08, so supply is perfectly inelastic at this price.
   • 0.2, so supply is relatively inelastic.
   • 12, so supply is perfectly elastic at this price.
   • 5, so supply is relatively elastic.

4. Which value of price elasticity of supply indicates perfectly inelastic supply?

   • Zero, since quantity supplied does not change at all when price changes.
   • Two, since quantity supplied changes twice as much as price in percentage terms.
   • Infinity, since any small rise in price causes an unlimited increase in quantity supplied.
   • One, since quantity supplied changes by the same percentage as the price.

5. Which factor is most likely to make the supply of a good more price elastic?

   • The good depends on rare raw materials that cannot be obtained quickly by producers in the market.
   • Stocks of the good can be held and sold quickly as the price rises, so firms respond readily.
   • Production requires specialised equipment that takes many years to build and install in factories.
   • There are long lead times before extra output can be produced, even if prices rise sharply.

6. Which factor is most likely to make the supply of a good less price elastic?

   • Producing more output requires specialised capacity and long lead times to expand.
   • Stocks of finished goods are easily held and released on to the market when prices rise.
   • Firms can switch quickly between producing this good and similar goods as prices change.
   • Spare capacity exists in the industry, so firms can raise output quickly when the price rises.

7. Why does the time period matter for the elasticity of supply?

   • In the long run supply becomes perfectly inelastic, since firms can no longer change output in response to price.
   • Time has no effect on supply elasticity, since producers always adjust output at the same speed in every period.
   • In the long run firms can adjust all factors of production, so supply tends to be more elastic than in the short run.
   • In the short run firms can adjust all factors instantly, so supply is more elastic than in the long run.

8. A firm's supply of a product is perfectly elastic. What does this mean?

   • Any small rise in price leads to an unlimited increase in quantity supplied, so the supply curve is horizontal.
   • Quantity supplied does not change at all whatever happens to the price, so the supply curve is vertical.
   • Quantity supplied falls as price rises, so the supply curve slopes downwards to the right.
   • Quantity supplied rises by exactly the same percentage as the price, so the elasticity is equal to one.

9. A farmer's output of wheat cannot be increased in the short run once the season has begun. What is the likely elasticity of supply in this period?

   • Relatively elastic, since farmers can freely switch to any other crop as soon as the price changes.
   • Unitary elastic, since output moves in exact proportion to changes in the price of wheat.
   • Perfectly elastic, since farmers can always double their output at once when the price rises.
   • Relatively inelastic, since land and crops cannot be expanded quickly in response to a price rise.

10. A market for a good has supply that is relatively elastic. What does this imply for the effect of a fall in demand on the equilibrium price?

    • The price rises, since producers respond to falling demand by raising the price of their output.
    • The price falls by more than it would if supply were inelastic, since producers cannot adjust output at all.
    • The price is unchanged, since supply elasticity does not affect the equilibrium price in any market.
    • The price falls by less than it would if supply were inelastic, since producers cut output more readily.

11. Explain why the price elasticity of supply tends to be higher for goods with stock that can be held cheaply.

    • Storage makes goods impossible to supply in the short run, so supply is always fixed in the market.
    • Goods that can be stored cheaply are always perfectly inelastic, since stock cannot be sold once it has been produced.
    • Firms can release stock on to the market quickly when prices rise, so quantity supplied responds more strongly to a price change.
    • Stock lowers costs so much that firms always supply the same quantity whatever the price in the market.

12. A government wants to know how much a rise in the price of a good will increase output. Which information is most useful?

    • The income elasticity of demand, since it shows how consumers respond to changes in their income.
    • The price elasticity of supply, since it shows the percentage change in quantity supplied for a given percentage change in price.
    • The price of the good in the previous year, since past prices always determine current output decisions.
    • The cross elasticity of demand, since it shows how demand for the good responds to changes in another good's price.

13. Which statement about elasticity of supply is correct?

    • A PES value of 0.5 means supply is relatively elastic, since quantity supplied rises more than price.
    • A PES value of 1 means that the percentage change in quantity supplied equals the percentage change in price.
    • A PES value of 1 means supply is perfectly inelastic, since quantity supplied is fixed at every price.
    • A PES value above 1 means that quantity supplied falls when price rises, so supply slopes downwards.

14. A firm's output rises by 15 per cent after a 5 per cent rise in price. What is the PES, and how should it be interpreted?

    • PES = 0.33, so supply is relatively inelastic and firms barely respond to the price increase.
    • PES = 20, so supply is perfectly elastic and output can rise without limit at a fixed price.
    • PES = -3, so supply is inelastic because output falls when the price of the good rises.
    • PES = 3, so supply is relatively elastic and firms respond strongly to price changes.

15. Evaluate: why might the elasticity of supply matter when analysing a tax on producers?

    • Inelastic supply always means firms stop producing after a tax, so the market disappears entirely in the short run.
    • Elastic supply means the tax has no effect on either quantity or price, since producers absorb it fully.
    • Elastic supply means firms cut output sharply after a tax, so quantity falls more and consumers face a smaller price rise.
    • Supply elasticity has no effect on taxes, since producers always pass the full tax on to consumers in every market.

16. A market has a price elasticity of supply of 0.6. A 10 per cent rise in price would increase quantity supplied by how much?

    • 6 per cent, since PES = percentage change in quantity supplied divided by percentage change in price.
    • 16.7 per cent, since 10 divided by 0.6 gives the percentage rise in quantity supplied.
    • 0.6 per cent, since elasticity is the absolute change in quantity for each 1 per cent in price.
    • 60 per cent, since PES is multiplied by the price change to give the quantity change.

17. Which of these is a short-run constraint on supply that is not present in the long run?

    • Changes in the price of the product, which firms can respond to only in the long run.
    • Long-run changes in population that shift demand for the product over time.
    • Fixed factors of production, such as factory size, that cannot be changed quickly.
    • Consumer incomes that cannot be changed by firms in any time period.

18. Which of the following is the correct formula for price elasticity of supply?

    • PES = percentage change in price divided by percentage change in quantity supplied.
    • PES = percentage change in quantity supplied divided by percentage change in price.
    • PES = change in total revenue divided by the change in quantity sold by the firm.
    • PES = percentage change in quantity demanded divided by percentage change in income.

19. A firm's supply elasticity is calculated as 0.8. What does this indicate?

    • Supply is perfectly elastic, since quantity supplied rises without limit at any price.
    • Supply is relatively inelastic, since quantity supplied rises by a smaller percentage than price.
    • Supply is unitary elastic, since quantity supplied rises by exactly the same percentage as price.
    • Supply is relatively elastic, since quantity supplied rises by a larger percentage than price.

20. Why might a firm with spare capacity have more elastic supply than one operating at full capacity?

    • It can raise output quickly in response to a higher price without investing in new plant.
    • It is unable to change output at all, so its supply is perfectly inelastic whatever happens to price.
    • It must reduce output as price rises, because spare capacity raises its marginal cost.
    • It has no costs, so it can supply any quantity at no change in price in the market.

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