Help - Economics Question

Audio

Hi all,

Ive come across this sample question for a economics paper im doing as part of CIMA.

Its a true or false statement:

Q: If the supply of fish is price inelastic, a reduction in supply will have a smaller effect on price than if the supply were price elastic

A: True - because supply is inelastic, the reduction in supply is mitigated as is the effect on price.

I would have thought this would be false. As an inelastic supply would lead to a greater change in price if supply is reduced... Im confused.

Can anyone help?

Cheers,

Steve

Économiste Monétaire

Completely missed this. Well, price elasticity of supply is the responsiveness of supply to a % change in price. The answer they give is kind of bizarre.

Graphically and by means of the PES formula I'd say the answer is wrong. Are you sure you wrote it out correctly?

PES = % change in quantity supplied/ % change in price. Let's take an inelastic value for PES, then an elastic value. Say quantity changes by 5 and PES is 0.2:

0.2 = 5/X => X = 5/0.2 = 25 (change in price)

Elastic value of 3 and change in quantity supplied is, again, 5:

3 = 5/X => X = 5/3 (change in price)

I drew a graph to illustrate the effect too (it's terribly drawn, but you get the idea): The graph on the left has a relatively inelastic supply curve and the graph on the right has an elastic supply curve


I could be reading the question wrong though. Brain is a bit fried at the moment. I think what they intended to write was what would happen to the quantity supplied if price were to increase/fall (rather than the quantity supplied itself falling).

Audio

Thanks for the response. Thats definetly what the question says. It must be wrong so...

leninbenjamin

for what it's worth, i can't see how it's true either.

Audio

Thanks for that. I was pulling my hair out with this the other day.