Price elasticity of supply (PES)

PES

measure of the responsiveness of the quantity supplied, following a change in price

-always a positive number

equation for PES

% change in quantity supplied / % change in price

what does it means if PES>1

PES > 1

Elastic

Supply changes more than proportionally to price ( can easily adjust supply)

factors: spare capacity , high stock levels, production time frame, easy to substitute FOP

what does it means if 0 < PES < 1

0 < PES < 1

Inelastic

Supply changes less than proportionally to price

e.g Housing (short term), farmland

what does it means if PES=0

PES=0

Perfectly inelastic

Quantity supplied does not change regardless of price

e.g Original Picasso painting

what does it means if PES=1

PES = 1

Unit elastic

Supply changes proportionally to price

e.g Some manufactured goods

what does it means if PES = ∞

PES = ∞

Perfectly elastic

Supply can change infinitely at one price

e.g Commodities in perfectly competitive markets

Determinants of PES

-Time Period (T)

---Short run → supply inelastic (producers cannot adjust quickly).

---Long run → supply more elastic (more time to increase production, expand capacity).

-Spare Capacity / Stock Levels

---More spare capacity → easier to increase supply → more elastic.

---w capacity → less elastic.

-Mobility of Factors of Production

---Easy to move resources → supply more elastic.

---Fixed resources → supply inelastic.

-Substitutability of Production

---Can resources be reallocated to produce this good?

---High substitutability → higher PES.

-Barriers to Entry / Regulation

---High barriers → inelastic supply.

---Free market, low barriers → more elastic supply.

diagram for inelastic supply

steep upward sloping curve.

diagram for elastic supply

flatter curve.

diagram for perfectly inelastic supply

vertical line

diagram for perfectly elastic supply

horizontal line.

importance of PES for firms

plan production and pricing strategies

importance of PES for governments

governments know how markets will respond to taxes, subsidies, or price controls.

uses of PES with inflation

Inflation: inelastic supply → price changes more with demand shocks; elastic supply → prices stable.

evaluation

-Time lag → short-term vs long-term supply responses differ.

-External shocks → PES may fall temporarily (natural disasters, strikes).

-Cost of inputs → if inputs are expensive or scarce → supply less elastic.

-Market structure → monopoly or heavily regulated markets → supply may be less elastic.

-PES varies across industries → manufacturing vs agriculture vs services.