Price elasticity of supply (PES)
Building on the concept of elasticity from demand, where we looked at consumer sensitivity, PES focuses entirely on producer behavior. If the price of a product rises, suppliers generally want to produce more to maximize profit. PES quantifies how much more they will actually produce.
In economics, we assume that supply curves slope upwards (as price increases, quantity supplied increases). However, the steepness of that curve varies. PES allows us to compare different goods and industries to see which ones can react quickly to market signals and which ones are constrained by physical or financial limitations.
Price elasticity of supply is the percentage change in quantity supplied resulting from a percentage change in price, holding all other factors constant.
It is a measure of responsiveness, not just a simple ratio. It answers the question: 'If price goes up by 10%, how much does the quantity supplied go up?'
PES = \frac{% \Delta Q_s}{% \Delta P}
Where:
- PES = Price elasticity of supply
- % \Delta Q_s = Percentage change in quantity supplied
- % \Delta P = Percentage change in price
Note on Signs:
Because the law of supply states that price and quantity supplied move in the same direction (both increase or both decrease), the numerator and denominator will always have the same sign. Therefore, the calculated PES value is typically positive. You do not need to worry about negative signs as you would with Price Elasticity of Demand (PED).
The price of wheat increases from 2.00 per kg to2.50 per kg. As a result, farmers increase the quantity supplied from 100 tonnes to 120 tonnes.
Step 1: Calculate the percentage change in price (% \Delta P)
% \Delta P = \frac{New Price - Old Price}{Old Price} \times 100
% \Delta P = \frac{2.50 - 2.00}{2.00} \times 100 = \frac{0.50}{2.00} \times 100 = 25%
Step 2: Calculate the percentage change in quantity supplied (% \Delta Q_s)
% \Delta Q_s = \frac{New Quantity - Old Quantity}{Old Quantity} \times 100
% \Delta Q_s = \frac{120 - 100}{100} \times 100 = \frac{20}{100} \times 100 = 20%
Step 3: Calculate PES
PES = \frac{20%}{25%} = 0.8
The PES is 0.8. This means that for every 1% increase in price, the quantity supplied increases by only 0.8%. The supply is relatively unresponsive to the price change.
Students often mix up the definitions. Remember:
- PED looks at how consumers react to price changes (quantity demanded).
- PES looks at how producers react to price changes (quantity supplied).
If a question asks about 'responsiveness of buyers', it is PED. If it asks about 'responsiveness of sellers/firms', it is PES.
A high PES (e.g., 3.0) does not mean the supply is 'bad'. It means the supply is highly responsive. A low PES (e.g., 0.1) means the supply is unresponsive or 'rigid'.
In many contexts, a high PES is desirable for firms because they can quickly ramp up production to meet rising demand and capture higher profits.
When to use specific terminology:
Examiners look for precise classification of the elasticity value. Use these exact terms based on the calculated number:
Perfectly Inelastic (PES = 0): Quantity supplied does not change at all regardless of price. The supply curve is a vertical line. This occurs when production cannot be increased instantly (e.g., land, rare artworks).
Inelastic (0 < PES < 1): The percentage change in quantity supplied is less than the percentage change in price. The supply curve is steep. This is common for goods that take time to produce or have limited spare capacity.
Unitary Elastic (PES = 1): The percentage change in quantity supplied is equal to the percentage change in price. A linear supply curve passing through the origin represents unitary elasticity at all points along the curve.
4. Elastic (PES > 1): The percentage change in quantity supplied is greater than the percentage change in price. The supply curve is flatter. This happens when firms have spare capacity or can easily source raw materials.
- Perfectly Elastic (PES = \infty): Producers are willing to supply any amount at a specific price, but nothing at a lower price. The supply curve is a horizontal line.
When asked to interpret a value like 0.8, accept phrases such as:
- 'Supply is inelastic.'
- 'Quantity supplied is unresponsive to price changes.'
- 'The percentage change in quantity supplied is less than the percentage change in price.'
Avoid vague terms like 'supply is low' or 'supply is small'. Always refer to responsiveness or elasticity.
The main factor determining PES is the time period under consideration. However, other structural factors also play a crucial role.
| Factor | Effect on PES | Explanation |
|---|---|---|
| Time Period | Longer time = More Elastic | In the short run, firms cannot easily change production levels (e.g., build new factories). In the long run, they can adjust all factors of production, making supply more elastic. |
| Spare Capacity | More spare capacity = More Elastic | If a firm has unused machinery or idle workers, it can increase output quickly and cheaply in response to a price rise. If operating at full capacity, supply is inelastic. |
| Stock Levels | Higher stocks = More Elastic | Firms that hold large inventories can release goods to the market immediately when prices rise, making supply very elastic. Perishable goods (like fresh fish) cannot be stocked, so their short-run supply is inelastic. |
| Mobility of Factors | High mobility = More Elastic | If resources (labor, capital, raw materials) can move easily between industries, firms can switch production quickly. For example, a factory making cars can be retooled to make trucks relatively easily. |
| Cost of Production | Rising costs = More Inelastic | If increasing output leads to sharply rising marginal costs (e.g., needing expensive overtime pay or scarce raw materials), supply becomes inelastic because it is too costly to produce more. |
The slope of the supply curve indicates elasticity. Remember: Steep = Inelastic, Flat = Elastic.
| Elasticity Type | PES Value | Graph Shape |
|---|---|---|
| Perfectly Inelastic | 0 | Vertical Line. Quantity supplied is fixed regardless of price. |
| Inelastic | < 1 | Steep Curve. A large change in price leads to a small movement along the curve (small change in quantity). |
| Unitary Elastic | = 1 | Linear curve passing through the origin. The ratio of P to Q is constant. |
| Elastic |
| Flat Curve. A small change in price leads to a large movement along the curve (large change in quantity). |
| Perfectly Elastic | \infty | Horizontal Line. Any amount is supplied at one specific price. |