Price elasticity of supply (PES) measures the responsiveness of the quantity supplied of a good or service to a change in its price. In simpler terms, it tells us how much the quantity producers are willing to offer for sale changes when the price changes.
It is a crucial concept in economics as it helps understand how markets adjust to changes in demand and how efficient resource allocation occurs.
Formula
PES is calculated as:
$$
PES = \frac{\text{Percentage change in quantity supplied}}{\text{Percentage change in price}}
$$
Interpretation of PES Values
The calculated value of PES provides information about the responsiveness of supply to price changes. Different values indicate different degrees of elasticity:
Elastic Supply ($|PES| > 1$): A significant change in quantity supplied occurs with a relatively small change in price. Producers are very responsive to price changes.
Inelastic Supply ($|PES| < 1$): A relatively small change in quantity supplied occurs with a larger change in price. Producers are not very responsive to price changes.
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:
Time Availability: Generally, supply becomes more elastic with time. Producers have more opportunity to adjust their production levels in response to price changes over time. For example, a farmer can adjust planting schedules for future seasons.
Availability of Substitute Inputs: If producers can easily switch to alternative inputs, supply will be more elastic.
Storage Facilities: If goods can be easily stored, supply will be more elastic. Producers can hold onto inventory if prices fall.
Spare Capacity: If producers have spare production capacity, they can increase output more easily in response to price increases, leading to more elastic supply.
Nature of the Good: The type of good also affects PES. For example, the supply of perishable goods is often inelastic because they cannot be stored for long.
Table Summarizing PES
PES Value
Interpretation
Example
$|PES| > 1$
Elastic Supply
A manufacturer can quickly increase production if the price rises.
$|PES| < 1$
Inelastic Supply
A commodity with limited supply, like a rare mineral, has an inelastic supply.
$|PES| = 1$
Unit Elastic Supply
The quantity supplied changes proportionally to the price change.
Suggested diagram: A graph showing the supply curve with different elasticity levels (elastic, inelastic, unit elastic) labeled.