Price Elasticity of Supply

Definition: The responsiveness of a quantity supplied of a product to a given change in price, ceteris paribus.

Formula: Price Elasticity of Demand (PED) = (%Δ Quantity Supplied) / (%Δ Price)

Sign: PES always has a +ve sign because of the direct relationship between P and Qs

Magnitude

Determinants of PES:

• Time period : The firm is unable to change its scale of operations easily due to the presence of fixed factors

• Availability of FOP : If FOP is not easily available, supply inelastic. If there is a ready pool of resources, producers can employ to produce more, supply elastic

• Ease of entry to the industry : Little or no barriers to entry, elastic. Airplane industry, large start up cost, less substitutes, hence tends to be inelastic

• Feasibility of Storage

• Gestation period: Longer gestation periods, supply tends to be inelastic

• Mobility of FOP : If FOP can be used for other production purposes, supply will be more elastic