What is PES or Price Elasticity of Supply?

Definition: Responsiveness of %Δ in quantity supply. PES is more for producers while PED is more for consumers.p

Formula: Change in Quantity supply/Change in price

(QS_2-QS_1/QS_1)*100/(P_2-P_1/P_1)*100

Types of Elasticity

Elastic Supply:

Definition: %Δ in QS > %Δ in price. In other words, producers are responsive when there is a change in price. PES = >1

Inelastic Supply:

Definition: %Δ in QS < %Δ in price. In other words, producers are not as responsive when there is a change in price. PES = 0<x<1

Perfectly Elastic Supply:

Definition: Producers are totally responsive to a change in price. Change in price will lead to the quantity supply to fall to zero. PES = infinity

Perfectly Inelastic Supply:

Definition: Producers are totally unresponsive to a change in price. Fixed quantity supply at any price level. PES = 0

Unitary:

Definition: %Δ in QS = %Δ in price

Determinants:

Ease of changing production:

The production process/technique can be changed easily. If it is very easy to change production then they will produce a lot because if the specific product fails, they can just change it without that much suffering or loss.

Availability of resources:

raw material, labour, machines are easily obtained/available, producer will be able to increase the supply easily. It is kind of like cooking. You can’t make a lot of winter melon soup if there isn’t a lot of winter melon.

Storability:

Storage(be kept for a longer time) when there is an increase in price, producers will increase the supply in large proportions as the goods can be stored without worrying about. Increase in production will lead to not being able to store the goods.

Time taken to produce the goods:

Short. When the goods can be produced within a short period of time, it will enable the producer to increase the quantity supply easily. If you wanted to make wine, your supply initially will be little because it takes a long time for it to be good.

The Application of PES to Firms

Assist firms to plan ahead. The amount of goods and services to be produced in order to cope with the demand. For example, when firms deal with inelastic supply goods, they should produce in advance by creating more machinery in order to cope with the rising quantity demand to prevent shortages as inelastic supply will take longer time to produce.