1.3.3 Price elasticity of supply

Price elasticity of supply:

• Measure of responsiveness of quantity supplied to a change in price

• PES = % Quantity supplied / % Price

PES = infinite : Perfectly elastic PES

• Any fall in price results in supply dropping to 0

PES > 1 : Elastic PES

• The percentage change in quantity supplied is greater than the percentage change in price 

• Producers are sensitive to changes in price

PES = 1 : Unitary PES

• The % change in quantity supplied is equal to the % change in price

• Supply has the same responsiveness to price changes

PES < 1 : Inelastic PES

• The % change in quantity supplied is less than the % change in price

• Producers are less sensitive to changes in price

PES = 0 : Perfectly inelastic PES

• Supply is fixed and can not respond to price changes

• (Lack of stock…)

Factors influencing PES

• Time period

• Availability of stock

• Mobility of factors of production

• Legal constraints

• Capacity

Time period:

• The longer the time. The more able suppliers will be able to change/adapt their supply

• Longer time = Elastic PES

Availability of stock:

• If the firm has stock reserved, it will be able to meet increased prices easily (by increasing production/sales)

• More stock available = Elastic PES

Mobility of factors of production

• Factors of production (like workers/machinery/inputs) can quickly switch from production of one item to a more profitable one

• More mobile factors of production = Elastic PES

Legal constraints

• Checks, certifications needed when product is made = slows down production

• More legal constraints = Inelastic PES

Capacity

• If the factory has extra space or unused workers, they can respond quickly to market changes

• If there is no extra space, it is more difficult for firms to meet demand from changes in price

• More spare capacity = Elastic supply

Short run

• Period where at least on factor of production is fixed

• Price inelastic supply: producers find it difficult to increase production

Long run

• Period where all factors of production are variable

• Price elastic supply: producers adjust to changing market conditions by buying more machinery, building new factories…, easier to increase capacity