Economics Perfect Competition Questions Long
Price elasticity of supply refers to the responsiveness of the quantity supplied to a change in price in a perfectly competitive market. In perfect competition, there are numerous firms producing identical products, and each firm is a price taker, meaning they have no control over the market price and must accept it as given.
The concept of price elasticity of supply in perfect competition is based on the idea that firms can easily enter or exit the market in the long run. This means that there are no barriers to entry or exit, and new firms can easily start producing the same product if they see potential profits. As a result, the number of firms in the market can adjust to changes in demand and supply.
In a perfectly competitive market, if the price of a product increases, firms are motivated to increase their production to take advantage of the higher price and potential profits. Conversely, if the price decreases, firms may reduce their production or exit the market if they cannot cover their costs.
The price elasticity of supply measures the degree of responsiveness of the quantity supplied to changes in price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price. A perfectly elastic supply occurs when a small change in price leads to an infinitely large change in quantity supplied, resulting in a horizontal supply curve. On the other hand, a perfectly inelastic supply occurs when a change in price has no effect on the quantity supplied, resulting in a vertical supply curve.
In perfect competition, the price elasticity of supply tends to be relatively high in the long run. This is because firms can easily enter or exit the market, allowing for a more flexible response to changes in price. If the price increases, new firms can enter the market and increase the overall supply, leading to a relatively elastic supply curve. Conversely, if the price decreases, firms can exit the market, reducing the overall supply and resulting in a relatively inelastic supply curve.
Overall, the concept of price elasticity of supply in perfect competition highlights the responsiveness of firms to changes in price. It emphasizes the ease of entry and exit in the market, which allows for a more flexible supply response.