Glossary
Fixed Costs
Costs that do not vary with the level of production or sales volume in the short run. These costs must be paid regardless of output.
Example:
The rent for a factory building is a fixed cost because it remains the same whether the factory produces 100 units or 10,000 units.
High PES (Elastic Supply)
Occurs when the percentage change in quantity supplied is greater than the percentage change in price, meaning producers are very responsive to price changes.
Example:
A software company can easily scale up its product delivery, so its supply is considered elastic, responding significantly to even small price increases.
Low PES (Inelastic Supply)
Occurs when the percentage change in quantity supplied is less than the percentage change in price, indicating that producers are not very responsive to price changes.
Example:
The supply of rare antique furniture is inelastic because its quantity cannot be easily increased, even if prices skyrocket.
Perfectly Elastic Supply
A theoretical situation where an infinite quantity is supplied at a particular price, but nothing is supplied at a slightly lower price. The supply curve is horizontal.
Example:
In a perfectly competitive market for a generic product like plain white t-shirts, if the price drops even slightly below the market rate, the perfectly elastic supply would instantly disappear as producers switch to other goods.
Perfectly Inelastic Supply
A situation where the quantity supplied does not change at all, regardless of any change in price. The supply curve is vertical.
Example:
The supply of original Picasso paintings is perfectly inelastic because no matter how high the price goes, no new original Picassos can be created.
Price Elasticity of Demand (PED)
Measures how sensitive the quantity demanded of a good is to a change in its price. It indicates how much consumers adjust their purchases in response to price fluctuations.
Example:
If the price of gasoline increases, consumers might reduce their driving, demonstrating the price elasticity of demand for fuel.
Price Elasticity of Supply (PES)
Measures how sensitive the quantity supplied of a good is to a change in its price. It indicates how much producers adjust their output in response to price fluctuations.
Example:
If the price of solar panels increases, a manufacturer with a high Price Elasticity of Supply might significantly boost production to capitalize on the higher profits.
Price Elasticity of Supply Coefficient (Es)
The numerical value derived from the PES formula, representing the degree of responsiveness of quantity supplied to a price change. It is calculated as the percentage change in quantity supplied divided by the percentage change in price.
Example:
If the Price Elasticity of Supply Coefficient for artisanal bread is 1.5, it means a 10% price increase would lead to a 15% increase in the quantity of bread supplied.
Quantity Supplied
The amount of a good or service that producers are willing and able to offer for sale at a specific price during a given period.
Example:
When the price of avocados rises, farmers increase the quantity supplied to the market, hoping to earn more revenue.
Relatively Elastic Supply
Occurs when the percentage change in quantity supplied is greater than the percentage change in price, with an elasticity coefficient greater than 1. Producers can easily increase output in response to price changes.
Example:
The supply of mass-produced plastic toys is often relatively elastic because manufacturers can quickly ramp up production lines to meet increased demand at higher prices.
Relatively Inelastic Supply
Occurs when the percentage change in quantity supplied is less than the percentage change in price, with an elasticity coefficient between 0 and 1. Producers have limited ability to quickly adjust output.
Example:
The supply of custom-built yachts is relatively inelastic because increasing production takes significant time and resources, even with higher prices.
Unit Elastic Supply
Occurs when the percentage change in quantity supplied is exactly equal to the percentage change in price, resulting in an elasticity coefficient of 1.
Example:
If a 10% increase in the price of a specific type of organic cotton leads to exactly a 10% increase in its unit elastic supply, the response is proportional.