Price Elasticity of Supply

Price Elasticity of Supply (PES)

The responsiveness of the quantity supplied of a product to a change in price, ceteris paribus.

Formula for PES

PES = (% Change in Quantity Supplied) / (% Change in Price)

Sign of PES

PES always has a positive sign due to the direct relationship between price and quantity supplied.

Determinants of PES:

Time period

Inability to adjust operations easily leads to inelastic supply.

Availability of Factors of Production (FOP)

Scarce FOP results in inelastic supply, while abundant FOP leads to elastic supply.

Ease of entry to the industry

Industries with low entry barriers tend to have elastic supply, while those with high barriers like the airplane industry tend to be inelastic.

Feasibility of Storage

Gestation period

Longer gestation periods result in inelastic supply.

Mobility of Factors of Production

Higher mobility of FOP leads to more elastic supply.