Comprehensive Notes on Price Elasticity of Supply (PES)
1.4 Price Elasticity of Supply (PES)
Introduction: The theory of Supply includes determinants of Supply, notably the price of the good itself. The key question is: by how much will the quantity supplied of the good change when the price of the good itself changes? For example, if the price rises by 10%, would the quantity supplied rise by:
1) 10%
2) more than 10%
3) less than 10%?
Change in quantity supplied is shown by a movement along the supply curve. In this lecture we focus on PES: the extent of change in Qs when P changes.
Visual idea: With a given ΔP, if Qs rises by a larger extent on SS2 than on SS1, the larger responsiveness is PES.
1.4.1 Definition
PES measures the degree of responsiveness of quantity supplied due to a change in the price of the same good, ceteris paribus.
1.4.2 Formula
Core formula: PES = \frac{\% 2\u0301Q_s}{\% 20P}
In percent-change form: PES = % change in Qs / % change in price.
An equivalent expression using absolute changes:
For small changes, PES is well approximated by the percent-change ratio:
1.4.3 Interpret Sign of PES
PES is always positive because of the direct (positive) relationship between price and quantity supplied (Law of Supply).
1.4.4 The Magnitude of PES
PES categories by magnitude:
Elastic Supply: PES > 1
Inelastic Supply: PES < 1
Unit Elastic: (unitary elasticity; not explicitly shown in all slides but commonly referenced)
Perfectly Elastic Supply:
Perfectly Inelastic Supply:
Interpretations:
Elastic Supply: a change in price causes a more-than-proportionate change in Qs. The supply curve is flatter (gentler slope).
Inelastic Supply: a change in price causes a less-than-proportionate change in Qs. The supply curve is steeper.
Perfectly Elastic: at a given price, producers are willing to supply an infinite quantity; horizontal supply curve.
Perfectly Inelastic: price changes do not change Qs; vertical su pply curve.
Illustrative examples from slides:
Elastic case: PES = 50% / 20% = 2.5 (a 20% price rise leads to a 50% rise in Qs).
Inelastic case: PES = 20% / 50% = 0.4 (a 50% price rise leads to only a 20% increase in Qs).
Infinite PES example: a price change leads to an infinite change in Qs (Perfectly Elastic).
Zero PES example: a price change leads to no change in Qs (Perfectly Inelastic).
Visual intuition:
PES > 1: flatter (gentler slope)
PES < 1: steeper slope
PES = ∞: horizontal supply curve at that price
PES = 0: vertical supply curve at that price
1.4.5 Determinants of PES
PES indicates how responsive producers are to a change in price. Responsiveness depends on how easy it is to alter output when price changes.
Main determinants (P, E, S, S):
P Length of Production
E Ease of getting resources (factor mobility, availability)
S Spare Capacity
S Stocks
i) Length of Production
Agricultural/primary products tend to be price inelastic because of long gestation periods and climatic conditions (e.g., rubber trees take ~7 years to mature before latex can be tapped).
Manufactured products tend to be more price elastic due to shorter production processes and greater control by manufacturers.
Implication: Longer production processes → lower PES (more inelastic); shorter processes → higher PES (more elastic).
ii) Ease of getting resources (Factor Mobility and Availability)
Factor Mobility: the ease with which factors of production (FOPs) can be moved from one place to another or from one use to another.
The greater the factor mobility, the easier it is to obtain resources to increase production, hence a more price-elastic supply.
Availability of resources: greater availability and accessibility of resources also increase ease of getting resources, increasing price elasticity of supply.
iii) Availability of Spare Capacity
Spare capacity = the extent to which capital goods (factories, machinery) are underutilised.
Full capacity = capital goods fully utilised; greater spare capacity means more ability to respond to price changes by using capital goods more fully to increase outputs.
Conclusion: More spare capacity -> higher PES (more elastic supply).
Example: Two factory situations (page references):
Situation 1: Max capacity 1000 units/day; currently producing 700 units.
Situation 2: Max capacity 1000 units/day; currently producing 1000 units.
Answer: Situation 1 has greater spare capacity and thus higher price elasticity of supply than Situation 2.
Practical question: Do you think the supply of surgical masks is price elastic or inelastic? Answer on slides: Price inelastic because many factories are already at full capacity.
iv) Availability of Stocks
Stocks refer to the amount of unsold goods kept in storage.
The greater the availability of stocks, the easier it is for a firm to increase quantity supplied when price rises by tapping into stocks, making supply more price elastic.
Level of stocks depends on the type of good:
Example: canned fruits vs fresh fruits.
Canned fruits have more price-elastic supply than fresh fruits because they are more durable and can be stored longer without quality loss or extra costs. Fresh fruits are perishable and cannot be stockpiled for long.
Additional notes from teaching examples (application of PES determinants)
The supply of manufactured products is generally more price elastic than the supply of agricultural/primary products.
Reasons for agricultural/primary products being inelastic: long gestation and climatic conditions beyond producers' control.
Counterpoint: for manufactured goods, shorter production times and some control over production enable higher elasticity.
Real-world and hypothetical examples illustrating determinants:
Pineapple tarts: near Chinese New Year, bakers cannot cope with too many orders; the supply is constrained by production capacity, illustrating limited elasticity.
HDB flats: building a flat takes ~3 years; supply is highly inelastic in the short run due to long construction times.
Microchips in China (COVID-19): factory closures reduce supply of mobile phones and other electronics, reflecting how external shocks can make PES more inelastic in the short run.
Panic buying: supermarkets run out of basic necessities due to sudden spikes in demand; but the PES for basic necessities can appear inelastic in the short term because of limited capacity to ramp up supply quickly.
Summary visuals from slides (PES concepts):
PES classification table (summary):
PES < 1: Inelastic (less than proportionate response)
PES = 1: Unit elastic
PES > 1: Elastic (more than proportionate response)
PES = ∞: Perfectly elastic
PES = 0: Perfectly inelastic
Reiterated examples show how and why different goods/situations yield different PES values.
Quick practice reminders (from slides):
Example: If a price increase by 10% leads to a 20% rise in Qs, then PES = 2.0 (elastic).
Example: If a price increase by 10% leads to a 5% rise in Qs, then PES = 0.5 (inelastic).
Remember the formula and interpret the magnitude to classify elasticity.
2. Quick recap and Summary visuals (from slides)
PES measures degree of responsiveness of Qs to a price change.
Positive sign is always observed; the magnitude determines elasticity class.
Determinants of PES determine how responsive firms will be in changing output when price changes.
In practice, manufactured goods often show higher PES than agricultural products due to production flexibility, spare capacity, and stock advantages.
3. Practical takeaway for exam prep
Be able to compute PES from given data:
Use
Interpret the result (elastic, unit elastic, inelastic; possibly perfectly elastic or perfectly inelastic).
Recognize determinants: Length of Production, Ease of getting resources (Factor Mobility), Spare Capacity, Stocks.
Apply to real-world examples (pineapple tarts, HDB flats, electronics supply shocks, panic buying) to explain why PES varies across goods and over time.