4.1.3.4 - Price Elasticity of Supply

Price Elasticity of Supply

The extent to which the quantity of supply of a good changes in response to a change in the price of that good.

PES =

% change in quantity supplied / % change in price

What value range should PES always be?

PES >= 0

Perfectly Elastic Supply

- PES = ∞

- Flat horizontal supply curve

- When there is a small change in price, supply rises from 0 to infinity

Elastic Supply

PES > 1

Less steep slope supply curve

When price changes, supply changes more proportionately

Unit Elastic Supply

PES = 1

When price changes, supply changes equally proportionately

Inelastic Supply

0 < PES < 1

- Steep slope supply curve

- When price changes, supply changes less proportionately

Perfectly Inelastic Supply

PES = 0

- Vertical Supply Curve

- When price changes, supply does not change

Factors determining the PES

PSSST

Production period - Goods that take longer to produce are more inelastic as it's difficult to raise Qs quickly

Spare capacity - Availability of spare capacity, if there are unsued resources it is easier to increase production

Stock - Ease of accumulating stocks; if the good allows easy accumaltion of stock (e.g. in warehouse) supply is more elastic

Switching - Ease of switching between alternative FoP; if a firm can raise production by employing more labour and employing more capital, supply more elastic

Time to adjust - Supply more elastic over longer time frame as more time to raise production