4.1.3.4 Price elasticity of supply

What does PES stand for?

PES stands for price elasticity of supply

What does PES measure?

PES measures the responsiveness of quantity supplied to a change in price

What is the equation for PES?

% change in quantity supplied / %change in price

What can producers do if supply is elastic?

If supply is elastic, producers can increase their output without a rise in costs or time delay

What do producers find hard to do if supply is inelastic?

Producers find it hard to change their production levels quickly in a given time period if supply is inelastic

When is supply elastic?

Supply of the good is elastic when the value of PES is greater than 1. The higher the value of PES, the more elastic supply is for the good.

What does elastic supply mean?

Elastic supply means that a relatively small percentage change in price will cause a larger percentage change in the quantity supplied

When is supply perfectly elastic supply?

Supply is perfectly elastic when PES = infinity. Any quantity demanded can be met without changing price.

When is supply inelastic?

Supply is inelastic when the value of PES is less than 1. The lower the value of PES, the more inelastic the supply is for the good

What does inelastic supply mean?

Inelastic supply means that a change in price leads to a relatively small percentage change in quantity supplied. PES<1

When is supply perfectly inelastic?

Supply is perfectly inelastic is when the supply curve is vertical and the elasticity of supply is zero (PES=0). At any price, the quantity supplied will be the same.

When is supply unit elastic?

Supply of a good is unit elastic if the percentage change in the quantity supplied is equal to the percentage change in price. (PES=1)

i.e. if the price of a good goes up by 10%, the quantity supplied will also increase by 10%

How is time scale a factor that affects PES?

Time scale affects PES because in the short run, supply is more price inelastic because producers cannot quickly increase supply. In the long run, supply becomes more price elastic.

i.e. A wheat farmer can’t instantly grow more wheat just because prices rise — it takes time.

Over a few years, a farmer could buy more land or switch crops if wheat prices stay high.

How is spare capacity a factor that affects PES?

Spare capacity affects PES because if the firm is operating at full capacity, there is no space left to increase supply. If there is plenty of spare capacity, then a firm can increase output without a rise in costs, and supply will be elastic in response to a change in demand.

i.e. Imagine a bakery that can make 1,000 loaves a day but is only producing 600:

If bread prices rise due to higher demand, it can easily boost production to 800 or 900 loaves without buying new ovens or hiring more staff.

So, it responds easily to the price change → elastic supply.

How is the level of stock available a factor that affects PES?

The level of stock available affects PES because if goods can be stored, firms can stock them and increase market supply easily. If the goods are perishable, firms cannot stock them for long so supply is more inelastic.

How is factor mobility a factor that affects PES?

Factor mobility affects PES because higher factor mobility leads to a more elastic PES as firms can quickly adjust production levels when price changes. A lower factor mobility leads to a more inelastic PES as its more difficult and costly to move resources between production activities.

How is the time period a factor that affects PES?

The time period affects PES because in the short run, PES is generally less elastic because firms have limited time to adjust production capacity. In the long run, PES tens to be more elastic as firms have time to expand capacity, adjust production techniques, and find new resources.

How are barriers to entry a factor that affects PES?

Barriers to entry is a factor that affects PES because higher barriers to entry means supply is more price inelastic as it is difficult for new firms to enter and supply the market.