Price Elasticity of Supply

A measure of the responsiveness of producers to price changes. Since there will always be a direct relationship between price and quantity supplied, the PES coefficient will always be positive.

As with PED and XED, the absolute value of YED can be:

• 0-1: Inelastic – Demand for the good is relatively unresponsive to changes in consumer income (quantity will change by a smaller percentage than the change in income)

• 1: Unit Elastic – Demand for the good is proportionally responsive to income changes (quantity will change by the same percentage as the change in income)

• >1: Elastic – Demand for the good is relatively responsive to changes in income (quantity will change by a larger percentage than consumers’ income)

Normal goods: A normal good is one with a POSITIVE YED coefficient. There is a direct relationship between income and demand. 

Example: As incomes fell, car sales fell as well. If incomes were to rise, car sales would begin to rise. Cars are a normal good.

Inferior goods: An inferior good is one with a NEGATIVE YED coefficient. This is a good that people will buy more of as income falls, and less of as income rises. 

Example: Bicycle transportation is an inferior good, because Americans demanded MORE bicycles as their incomes fell. If income were to rise, bicycle sales would begin to fall.