Price Elasticity of Supply (PES)

Introduction

Price elasticity of supply (PES) measures the responsiveness of the quantity supplied of a good or service to a change in its price. It is a crucial concept in economics as it helps us understand how producers react to changes in market prices. A high PES indicates that producers can easily adjust their output in response to price changes, while a low PES suggests that supply is relatively unresponsive to price fluctuations.

Formula for PES

The price elasticity of supply is calculated using the following formula:

$$ PES = \frac{\% \Delta Quantity Supplied}{\% \Delta Price} $$

Where:

• $\% \Delta Quantity Supplied$ is the percentage change in the quantity supplied.
• $\% \Delta Price$ is the percentage change in the price.

Interpreting PES Values

The calculated PES value provides information about the responsiveness of supply:

• Elastic Supply (PES > 1): A relatively large change in quantity supplied occurs in response to a small change in price. Producers can easily adjust their output.
• Inelastic Supply (PES < 1): A relatively small change in quantity supplied occurs in response to a large change in price. Producers have limited ability to adjust their output quickly.
• Unit Elastic Supply (PES = 1): The percentage change in quantity supplied is equal to the percentage change in price.

Factors Affecting PES

Several factors influence the price elasticity of supply:

1. Time Availability: Generally, supply becomes more elastic over longer time periods. Producers have more time to adjust production processes, find alternative inputs, and respond to price changes.
2. Availability of Substitute Inputs: If producers have access to readily available substitute inputs, they can adjust their output more easily, leading to a more elastic supply.
3. Storage Facilities: Goods that can be easily stored have a more elastic supply. Producers can hold onto inventory until prices rise.
4. Spare Capacity: If producers have spare production capacity, they can increase output without incurring significant additional costs, resulting in a more elastic supply.
5. Speed of Production Process: Industries with rapid production processes tend to have more inelastic supply.

Example Calculation

Suppose the price of a certain type of wheat increased from $500 per tonne to $550 per tonne. As a result, the quantity supplied increased from 100 tonnes to 110 tonnes.

To calculate the PES:

$$ PES = \frac{\% \Delta Quantity Supplied}{\% \Delta Price} $$

$\% \Delta Quantity Supplied = \frac{110 - 100}{100} \times 100 = 10\%$

$\% \Delta Price = \frac{550 - 500}{500} \times 100 = 10\%$

$$ PES = \frac{10\%}{10\%} = 1 $$

In this case, the price elasticity of supply is 1, indicating unit elastic supply.

Table Summary

Factor	Effect on PES
Time Availability	Generally increases PES over time.
Availability of Substitute Inputs	Increases PES.
Storage Facilities	Increases PES.
Spare Capacity	Increases PES.
Speed of Production Process	Decreases PES.

Conclusion

Understanding price elasticity of supply is essential for analyzing market dynamics and predicting how producers will respond to changes in market prices. It is a key concept for evaluating the efficiency of resource allocation.