Price Elasticity of Supply (PES)

Definition

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 market price changes.

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 insights into the nature of supply elasticity:

• Perfectly Elastic Supply (PES = ∞): Suppliers are willing to supply any quantity at a given price, but zero quantity at a lower price. The supply curve is horizontal.
• Elastic Supply (PES > 1): The quantity supplied changes by a larger percentage than the percentage change in price. Producers are relatively responsive to price changes. The supply curve is relatively flat.
• Unit Elastic Supply (PES = 1): The quantity supplied changes by the same percentage as the percentage change in price.
• Inelastic Supply (PES < 1): The quantity supplied changes by a smaller percentage than the percentage change in price. Producers are relatively unresponsive to price changes. The supply curve is relatively steep.
• Perfectly Inelastic Supply (PES = 0): The quantity supplied does not change at all, regardless of the price change. The supply curve is vertical.

Factors Affecting Price Elasticity of Supply

Several factors influence how elastic the supply of a good or service is:

• Time Availability: Generally, supply becomes more elastic over time. Producers have more opportunity to adjust production levels, find alternative inputs, and respond to price changes.
• Availability of Substitute Inputs: If producers can easily switch to alternative inputs, supply will be more elastic.
• Spare Capacity: If producers have spare capacity (unused resources), they can increase output more easily in response to a price increase, leading to more elastic supply.
• Storage Facilities: If a good can be easily stored, producers can accumulate inventory and respond to price changes more readily.
• Speed of Production Process: Production processes that are quick and easy to scale up tend to have more elastic supply.

Graphical Representation

The price elasticity of supply is typically represented graphically using the supply curve. A perfectly inelastic supply is represented by a vertical line, while perfectly elastic supply is represented by a horizontal line.