Price Elasticity of Supply

How can we calculate PES?

percentage change in quantity supplied / percentage change in price

What is price elastic supply?

Supply is very responsive to a change in price. The ability to supply as a result of a change in price is high when price elastic. If the price is high, the firm is more able and willing to respond quickly and supply more.
>1

What is price inelastic supply?

Supply is not very responsive to a change in price. The ability to change supply as a result of a change in price is low. If the price is low, the firm is less willing and able or unable to repond quickly and supply more.
<1

How does production lag affect PES?

• Lag refers to the time delay between sales and productions

• If it takes a long-time to bring the goods / services to the market, then the more price inelastic supply will be

• If production is quick and easy, then supply will be much more price elastic.

How do stocks affect PES?

• To hold a larger amount of stock, it is necessary to have a larger warehouse.

• The more stock there is, the quicker and easier it is to place orders + there is more price elastic supply

• But if the customers must wait longer for stock, then supply is price inelastic

• Inventory is able to meet demand quickly though higher costs come with storing although quantities.

How does spare capacity affect PES?

• Can facilities be repurposed easily to manage supply requirements?

• How flexible are their workers and are they trained to carry out a range of roles

• Need of sufficient workers to cope with increased supply or can the firm easily hire when needed without negatively impacting costs.

How does substitutability affect PES?

• Availability of substitutes

• If it’s easier for producers to manufacture a different good / service, then supply will be more price elastic

• The easier it is to switch products, the more price elastic supply will be.

How does time affect PES?

• In the short run producers are likely to be more price inelastic (hard to increase production).

• The only factor of production that is relatively easy to increase is labour, in the long run, there’s more time to utilise all FoP to increase supply.

• In the long run, producers are more price elastic, able to buy more machinery, build new factories and increase capacity.

Why is max price elasticity the best case?

• Producers are able to supply more when demand is high and supply less when demand and price are low to maximize profits