Price Elasticity of Supply

What is Price Elasticity of Supply?

• Price elasticity of supply, or PES, functions the same way as PED, but is applicable to supply instead.
• PED measures the quickness and the extent to which suppliers will respond to changes in the selling price.

• The speed and extent to which producers react to price changes depends on the value of the elasticity of supply of their product.
• It measures how much of the quantity supplied of a good changes when there is a change in its own price.

Formulas

• PES = Percentage change in quantity supplied/ percentage change in price

PES = %ΔQs/%ΔP

• If the percentage change in the quantity supplied is larger than the percentage change in the price of a good, then the product has elastic supply.
• If the percentage change in the quantity supplied of a good less than the percentage change in the price of a good, then it has inelastic supply.

• As quantity supplied and price have a direct relationship, PES will always be positive.

Different Values of PES

• Elastic supply curves are less steep while inelastic supply curves have steeper slopes.

PES < 1

• When the PES is lower than 1, a change in price leads to a proportionately smaller change in quantity supplied.
• The supply is inelastic.

PES > 1

• A change in price leads to a proportionately greater change in the quantity supplied.
• The supply is elastic.

PES = 0

• Perfectly inelastic supply.
• A change in price leads to no change in the quantity supplied.
• The supply is not responsive to price; producers are not sensitive to price changes.

• Only occurs when the supply is set, and is very difficult to increase or decrease.
• For example: farmed goods and seats in cinemas or sports games.

PES = infinity

• Perfectly elastic supply.
• At a certain price, the quantity supplied is infinite. A change in the price downwards leads to a fall in supply to zero, an infinite change.
• Producers are extremely sensitive to price changes.

• Can occur in real life in the supply of commodities for import traded on a global scale, such as gold or wheat.
• Everyone knows what everyone else is selling at, thus no one is willing to sell at a lower price and no one is willing to buy at a higher price.
• In these scenarios supply isn't perfectly elastic (as supply can't ever equal infinity), but it is very close and functions in the same way.

PES = 1

• Unitary elasticity of supply.
• A percentage change in price leads to an equal percentage change in the quantity supplied. Producers are proportionally sensitive to price changes.
• Only occurs theoretically.

Determinants of PES

Time

• Depends on how long it takes to produce the good.
• Supply tends to be elastic when long time periods are considered, as suppliers have more time to restructure and adjust to changes.
• Oppositely, supply tends to be inelastic when only short time periods are considered.

Mobility and Flexibility of Production

• Depends on the flexibility of the resources used to make the product.
• Products whose manufacturing is flexible (cheap and easy to reduce or increase), are more elastic, and vice versa.

Unused Capacity

• Depends on the scarcity and cost of the resources used for production.
• If more resources can be easily obtained, then the supply will be more elastic and vice-versa.

Storability

• If the firm has the ability to store stock and increase quantity supplied by accessing warehouses, the supply will be more inelastic.
• Suppliers will want to sell products with short lifespans, such as food, as quickly as possible, and cannot afford to store them (they would degrade).

Rate of production Costs

• Depends on the scarcity and cost of the resources used for production.
• If more resources can be easily obtained, then the supply will be more elastic and vice-versa.

Primary Commodities vs Manufactured Goods

• Manufactured goods have a higher elasticity of supply compared to primary commodities.

• Due to the high investment and long time periods of work, primary commodities typically have a low PES (inelastic supply) compared to manufactured goods.
• For example, a farmer must wait an entire planting season to respond to changes in price. They cannot simply increase their crop yields to increase the quantity supplied.