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. It is a crucial concept in economics for understanding how producers react to market price fluctuations.

Formula

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

$$ E_S = \frac{\text{Percentage Change in Quantity Supplied}}{\text{Percentage Change in Price}} $$

Alternatively, it can be calculated as:

$$ E_S = \frac{\Delta Q / Q}{\Delta P / P} $$

Where:

• $E_S$ represents the price elasticity of supply.
• $\Delta Q$ is the change in quantity supplied.
• $Q$ is the initial quantity supplied.
• $\Delta P$ is the change in price.
• $P$ is the initial price.

Calculating Price Elasticity of Supply

To calculate PES, you need to determine the percentage change in quantity supplied and the percentage change in price.

Example:

If the price of a good increases from £10 to £15, and as a result, the quantity supplied increases from 100 units to 150 units, then the PES is calculated as follows:

$$ E_S = \frac{(150 - 100) / 100}{(15 - 10) / 10} = \frac{50 / 100}{5 / 10} = \frac{0.5}{0.5} = 1 $$

In this case, the PES is 1, which indicates unitary elasticity of supply.

Factors Affecting Price Elasticity of Supply

Several factors influence the price elasticity of supply:

• Time Availability: Generally, the more time producers have to respond to a price change, the more elastic the supply will be. This is because they can adjust their production levels, find alternative inputs, or increase storage.
• Availability of Inputs: If the necessary resources (e.g., raw materials, labor) are readily available, supply will be more elastic.
• Spare Capacity: If producers have spare production capacity, they can easily increase output in response to a price increase, leading to a more elastic supply.
• Ease of Storage: Goods that can be easily stored have a more elastic supply because producers can hold onto inventory until prices rise.
• Production Processes: Production processes that are easily adaptable to changes in output will result in a more elastic supply.

Types of Price Elasticity of Supply

Based on the calculated value, PES can be categorized into different types:

Type	Value	Interpretation
Perfectly Inelastic Supply	$E_S = 0$	Quantity supplied does not change with changes in price. (Vertical supply curve)
Inelastic Supply	$0 < E_S < 1$	Percentage change in quantity supplied is less than the percentage change in price.
Unitary Elastic Supply	$E_S = 1$	Percentage change in quantity supplied is equal to the percentage change in price.
Elastic Supply	$1 < E_S < \infty$	Percentage change in quantity supplied is greater than the percentage change in price.
Perfectly Elastic Supply	$E_S = \infty$	Producers are willing to supply any quantity at a given price. (Horizontal supply curve)

Applications of PES

Understanding PES is important for:

• Analyzing Market Outcomes: PES helps determine how changes in price affect the quantity supplied and the overall market equilibrium.
• Policy Decisions: Governments can use information about PES to design effective policies, such as tax policies or subsidies.
• Business Strategy: Businesses can use PES to make decisions about production levels and pricing strategies.