Price elasticity of supply (PES) Revision Notes

Price elasticity of supply (PES) is an economic concept that quantifies the responsiveness of the quantity of a good or service supplied by producers when its market price changes. It shows how much the amount producers are willing and able to sell changes as the price rises or falls.

For example, if the price of apples increases, producers might supply more apples. PES measures the proportionate change in quantity supplied relative to the proportionate change in price.

• PES = % change in quantity supplied ÷ % change in price
• It is a ratio without units, indicating responsiveness

The value of PES indicates whether supply is elastic or inelastic:

If PES > 1, supply is elastic. Producers can increase output significantly when prices rise.

If PES < 1, supply is inelastic. Producers find it difficult to change output quickly in response to price changes.

• Elastic supply example: A clothing manufacturer can quickly increase production when prices rise, so PES might be 1.5.
• Inelastic supply example: A farmer cannot quickly increase wheat production due to growing seasons, so PES might be 0.3.

To calculate PES, use the formula: PES = (Percentage change in quantity supplied) ÷ (Percentage change in price).

For instance, if the price of a good rises by 10% and the quantity supplied increases by 20%, then:

PES = 20% ÷ 10% = 2, indicating elastic supply. This means producers respond strongly to price changes.

• Always express changes as percentages.
• Calculate percentage changes using: (New value - Original value) ÷ Original value × 100%

Several factors influence how elastic or inelastic supply is:

Time period: Supply tends to be more elastic in the long run as producers can adjust production capacity.

Availability of resources: If raw materials or labour are readily available, supply is more elastic because production can be increased easily.

• Example: A bakery can quickly bake more bread if prices rise (elastic supply).
• Example: Oil supply is often inelastic in the short term due to extraction limits.

Knowing PES helps producers and policymakers anticipate how supply will react to price changes, affecting market equilibrium and revenue.

For example, if supply is elastic, a price increase leads to a large increase in quantity supplied, potentially stabilising prices.

If supply is inelastic, quantity supplied changes little, so price changes can be more volatile.

• Businesses can plan production and pricing strategies.
• Governments can predict effects of taxes or subsidies on supply.

Price elasticity of supply (PES) measures how responsive the quantity supplied of a good or service is to a change in its price. It quantifies the percentage change in quantity supplied resulting from a one percent change in price.

The formula to calculate PES is: PES = (% Change in Quantity Supplied) ÷ (% Change in Price).

To calculate the percentage changes, use the formula: Percentage change = (New value - Original value) ÷ Original value × 100%.

• PES = % Change in Quantity Supplied / % Change in Price
• Percentage changes must be calculated accurately before substitution
• PES is a ratio and has no units

Suppose the price of a product rises from $10 to $12, and as a result, the quantity supplied increases from 100 units to 130 units. Calculate the PES.

Step 1: Calculate the percentage change in quantity supplied: ((130 - 100) / 100) × 100% = 30%.

Step 2: Calculate the percentage change in price: ((12 - 10) / 10) × 100% = 20%.

• PES = 30% ÷ 20% = 1.5
• Since PES > 1, supply is elastic in this example
• This means suppliers can increase output proportionally more than the price increase

The value of PES indicates how supply responds to price changes:

If PES > 1, supply is elastic: quantity supplied changes by a larger percentage than price. Suppliers can adjust production easily.

If PES < 1, supply is inelastic: quantity supplied changes by a smaller percentage than price. Suppliers find it difficult to change production quickly or significantly due to constraints such as limited capacity or resources. If PES = 1, supply is unitary elastic: quantity supplied changes by the same percentage as price.

• Elastic supply (PES > 1): flexible production, e.g., manufactured goods with spare capacity
• Inelastic supply (PES < 1): rigid production, e.g., agricultural products with fixed growing seasons
• Unitary elastic supply (PES = 1): proportional responsiveness

Supply curves graphically represent the relationship between price and quantity supplied. The slope of the supply curve relates to PES:

Elastic supply curves are relatively flat, showing large quantity changes for small price changes.

Inelastic supply curves are steep, showing small quantity changes despite price changes. A unitary elastic supply curve has an intermediate slope where proportional changes occur.

• Draw a flat supply curve to represent elastic supply (PES > 1)
• Draw a steep supply curve to represent inelastic supply (PES < 1)
• Label axes: Price (vertical), Quantity Supplied (horizontal)
• Use arrows to show how a price increase leads to different quantity changes depending on elasticity

Understanding PES helps producers and policymakers anticipate how supply will react to price changes:

For elastic supply, producers can increase output quickly when prices rise, potentially increasing revenue.

For inelastic supply, producers cannot easily increase output, so price changes have less effect on quantity supplied, which may lead to shortages or surpluses if demand shifts unexpectedly. Governments use PES knowledge to predict market responses to taxes, subsidies, or regulations.

• Elastic supply favours industries with flexible production methods
• Inelastic supply is common in industries with long production times or limited resources
• PES affects pricing strategies and inventory management

Price elasticity of supply (PES) measures how much the quantity supplied of a good changes in response to a change in its price. If supply is elastic, producers can increase output significantly when prices rise. If supply is inelastic, quantity supplied changes little despite price changes. Understanding what determines this responsiveness helps explain market dynamics and producer behaviour.

The time available for producers to respond to price changes is a crucial factor. In the short run, supply tends to be inelastic because firms cannot quickly alter production levels due to fixed capacity or contracts. For example, a farmer cannot instantly grow more wheat if prices rise today because planting and harvesting take months.

Over the long run, supply becomes more elastic as firms can invest in new machinery, hire more workers, or enter/exit the market. For instance, a car manufacturer can build a new factory over several years, increasing supply if prices remain high.

• Short run: limited ability to change output → inelastic supply.
• Long run: more flexibility and capacity adjustments → elastic supply.

Supply elasticity depends on how easily producers can access the inputs needed for production, such as labour, raw materials, and capital.

If these factors are readily available and can be increased without much difficulty or cost, supply tends to be elastic. For example, a bakery with access to abundant flour and staff can quickly bake more bread if prices rise.

Conversely, if inputs are scarce or specialised, supply is inelastic. For example, a rare mineral mined in limited locations cannot be produced more quickly even if prices increase.

• Easy access to inputs → elastic supply.
• Scarce or specialised inputs → inelastic supply.

The characteristics of the good itself influence supply elasticity. Goods that can be stored without spoilage or produced continuously tend to have more elastic supply.

For example, manufacturers of electronic gadgets can stockpile inventory and increase supply rapidly when prices rise.

In contrast, perishable goods like fresh fish or flowers have inelastic supply because they cannot be stored long and production cannot be ramped up quickly.

• Storable, durable goods → elastic supply.
• Perishable or seasonal goods → inelastic supply.

If producers can easily switch between different inputs or production methods, supply is more elastic. This flexibility allows firms to adjust output efficiently when prices change.

For example, a furniture maker who can use either wood or metal depending on availability can respond faster to price changes.

If production relies on specific inputs that cannot be substituted, supply is more inelastic. For instance, a vineyard depends on grape harvests and cannot substitute other inputs to increase wine production quickly.

• High input substitutability → elastic supply.
• Low input substitutability → inelastic supply.

Price elasticity of supply (PES) quantifies the responsiveness of the quantity supplied of a good to a change in its price. It is calculated using the formula:

PES = (Percentage change in quantity supplied) ÷ (Percentage change in price).

For example, if the price of a product rises by 10% and the quantity supplied increases by 20%, then PES = 20% ÷ 10% = 2. This means supply is elastic, as quantity supplied changes proportionally more than price. Conversely, if quantity supplied changes less than price, supply is inelastic. Understanding PES helps predict how suppliers will react to price changes, which is crucial for market analysis.

• PES = % change in quantity supplied ÷ % change in price.

Producers use PES to plan production and pricing strategies. When supply is elastic, producers can increase output quickly in response to price rises, allowing them to maximise revenue during high demand periods. For example, a bakery can bake more bread if prices rise, as it can easily increase production.

If supply is inelastic, producers cannot easily adjust output, often due to limited resources or production capacity. For instance, a farmer cannot quickly increase the supply of wheat after a price rise because growing crops takes time. In such cases, producers may focus on long-term investments to improve elasticity.

Producers also consider PES when setting prices. If supply is elastic, a small price increase can lead to a large increase in quantity supplied, potentially saturating the market and lowering prices again. Understanding PES helps producers avoid overproduction or shortages.

Consumers are affected by PES through the availability and price stability of goods. When supply is elastic, an increase in demand leading to higher prices is met with a rapid increase in supply, stabilising prices and ensuring availability. For example, if demand for smartphones rises, manufacturers can ramp up production, preventing large price hikes.

In contrast, inelastic supply means that price increases due to higher demand may not be met with increased supply, causing prices to rise sharply and reducing consumer access. For example, limited supply of rare concert tickets leads to high prices and scarcity.

Consumers benefit from understanding PES because it influences their purchasing decisions and expectations about price fluctuations and product availability.

Governments consider PES when designing taxes, subsidies, and regulations to influence markets effectively. If supply is elastic, imposing a tax on a good may lead producers to reduce output significantly, potentially causing shortages. For example, a tax on agricultural products with elastic supply might reduce farmers’ production sharply.

If supply is inelastic, taxes may increase prices without greatly reducing quantity supplied, which can raise government revenue but may burden consumers. For instance, taxing petrol, which has inelastic supply in the short term, tends to raise prices more than reduce supply.

Subsidies are also affected by PES. Subsidising goods with elastic supply encourages producers to increase output substantially, improving availability. Governments use PES data to predict the outcomes of interventions and avoid unintended consequences such as black markets or supply shortages.

Consider the market for fresh fish. The supply of fresh fish is often inelastic in the short term because fishermen cannot instantly increase their catch. If demand rises and prices increase, the quantity supplied changes little, causing prices to rise sharply and potentially limiting consumer access.

Over time, supply may become more elastic as fishermen invest in better equipment or more boats, allowing them to respond better to price changes.

This example shows how PES affects producers’ ability to respond, consumers’ access to goods, and how governments might regulate fishing quotas or taxes to balance economic and environmental goals.