Price elasticity of supply (PES) measures the responsiveness of the quantity supplied of a good or service to a change in its price. It's a crucial concept in understanding how markets adjust to changes in demand and price signals.
Understanding PES
PES is calculated as:
PES = $\frac{\text{Percentage Change in Quantity Supplied}}{\text{Percentage Change in Price}}$
The value of PES can be:
Elastic Supply (PES > 1): A significant change in quantity supplied occurs with a relatively smaller change in price.
Inelastic Supply (PES < 1): A relatively smaller change in quantity supplied occurs with a relatively larger change in price.
Unit Elastic Supply (PES = 1): The percentage change in quantity supplied is equal to the percentage change in price.
Diagrammatic Representation of PES
The supply curve is used to illustrate different types of PES. The shape of the supply curve determines the elasticity.
Elastic Supply
An elastic supply curve is relatively flat. This indicates that producers can easily adjust their output in response to price changes.
Suggested diagram: A relatively flat supply curve, indicating a large percentage change in quantity supplied with a smaller percentage change in price.
Price
Quantity Supplied
Percentage Change in Price
Percentage Change in Quantity Supplied
PES
$10
100
-
-
-
$12
110
20%
10%
0.5
$14
120
16.67%
9.09%
0.6
Inelastic Supply
An inelastic supply curve is steep. This indicates that producers have limited ability to adjust their output in response to price changes.
Suggested diagram: A steep supply curve, indicating a small percentage change in quantity supplied with a larger percentage change in price.
Price
Quantity Supplied
Percentage Change in Price
Percentage Change in Quantity Supplied
PES
$10
100
-
-
-
$12
105
20%
-5%
-0.5
$14
100
16.67%
-5.45%
-0.35
Unit Elastic Supply
A unit elastic supply curve is neither particularly flat nor steep. The percentage change in quantity supplied is equal to the percentage change in price.
Suggested diagram: A supply curve with a moderate slope, indicating a 1:1 relationship between percentage changes in price and quantity supplied.
Price
Quantity Supplied
Percentage Change in Price
Percentage Change in Quantity Supplied
PES
$10
100
-
-
-
$12
110
20%
10%
1
$14
120
16.67%
9.09%
1
Factors Affecting PES
Several factors influence the elasticity of supply:
Time: Supply tends to be more elastic over longer periods. Producers have more time to adjust production levels.
Availability of Resources: If resources are readily available, supply is more elastic.
Spare Capacity: If a firm has spare capacity, it can easily increase production in response to a price increase, leading to elastic supply.
Ease of Storage: Goods that can be easily stored have more elastic supply.
Competitiveness: If a market is competitive, firms are more likely to respond to price changes, resulting in more elastic supply.
Importance of PES
Understanding PES is important for:
Government Policy: Governments consider PES when designing taxes and subsidies.
Business Decisions: Businesses need to understand how their supply will respond to price changes to make informed production decisions.
Market Analysis: PES helps in analyzing market equilibrium and predicting the impact of price changes.