Price elasticity of supply (PES) — practice question

Historically, the people of Iceland relied mainly on farming and fishing for their income. By 2008, the Icelandic economy was also extremely reliant on its financial sector. Even so, the country is now widely recognised around the world for tourism. Although the primary sector now provides employment for only a small share of the labour force, it still has a very strong influence on policy decisions. For instance, the fishing industry is subject to many government rules. Restrictions on foreign investment in the fishing industry both protect domestic fishermen and preserve the fish stock in Icelandic waters. Regulation also influences the price elasticity of supply (PES) of fish. The quantity supplied usually changes by a smaller percentage than the change in price. From 2002 to 2007, Iceland’s average yearly economic growth rate was 5%. In 2006, Iceland’s Gross Domestic Product (GDP) was US$17 billion and in 2007 it rose by 9%. This rapid growth was caused by greater access to bank loans and by rising incomes in its main trading partners, including the European Union (EU) and Norway. It was during this time of fast economic expansion that the financial sector became a major part of the Icelandic economy. The leading commercial banks helped to increase consumer spending and large construction projects, both of which raised the standard of living of Icelanders. In addition, commercial banks also expanded into overseas markets. These international markets grew quickly between 2002 and 2007, which brought more money back into Iceland’s financial sector. However, Iceland experienced a major financial crisis in 2008, when all three of its main privately owned commercial banks collapsed. This caused total output to fall and unemployment to rise. Fig. 1.1 shows the economic growth rate and unemployment rate in Iceland from 2002 to 2014. Fig. 1.1 Economic growth rate and unemployment rate in Iceland from 2002 to 2014. Recovery from 2010 to 2017 was first made possible by loans from international organisations. More recently, it was also supported by successful tourism campaigns that have turned Iceland into a 'must-see' place for tourists.