Price elasticity of supply
Price elasticity of supply (PES) measures how responsive quantity supplied is to a change in price. In simple words, it shows whether producers can change supply by a lot, a little, or not at all when price changes.
Main idea
- Elastic supply means quantity supplied changes by a larger percentage than price.
- Inelastic supply means quantity supplied changes by a smaller percentage than price.
- Perfectly inelastic supply means quantity supplied does not change at all.
- Perfectly elastic supply means any amount can be supplied at one price.
What does PES tell us?
It tells us how easily producers can respond to a change in price.
Why does it matter?
Some goods can be produced quickly, while others take more time.
Usual rule
Price rises usually encourage producers to supply more, so PES is normally positive.
1. How to calculate PES
The formula for PES is:
PES = percentage change in quantity supplied ÷ percentage change in price
How to understand the example: the price of beans rises by 10% and quantity supplied rises by 5%. So, PES = 5% ÷ 10% = 0.5. Because the answer is less than 1, supply is price inelastic.
2. Price elastic supply
Supply is price elastic when a change in price causes a larger percentage change in quantity supplied. This usually happens when firms have spare capacity, enough workers, easy access to raw materials and can increase output quickly.
How to read the graph: price rises from P₁ to P₂, but quantity supplied rises by a bigger amount from Q₁ to Q₂. This means producers can respond strongly to the price increase. The curve is relatively flat, showing elastic supply.
3. Price inelastic supply
Supply is price inelastic when a change in price causes a smaller percentage change in quantity supplied. This happens when it is difficult or slow to increase production. For example, fresh fruit and vegetables take time to grow.
How to read the graph: price again rises from P₁ to P₂, but quantity supplied only rises a little from Q₁ to Q₂. This means firms cannot easily increase output. The curve is relatively steep, showing inelastic supply.
4. Special cases of PES
These are extreme cases that help students understand the full range of elasticity.
Perfectly price inelastic supply
Supply is perfectly price inelastic when quantity supplied does not change at all even if price changes. The value of PES is 0. This can happen when total supply is fixed, such as seats in a stadium or land in a certain location.
How to read the graph: when price changes from P₁ to P₂, quantity supplied stays fixed at Qe. Because output does not change, supply is perfectly inelastic.
Perfectly price elastic supply
Supply is perfectly price elastic when producers are willing to supply any quantity at one particular price. The value of PES is infinity (∞). It is a theoretical case, but it helps show what a completely elastic supply looks like.
How to read the graph: the supply curve is horizontal at Pe. Quantity supplied can rise from Q₁ to Q₂ without any change in price. This shows perfectly elastic supply.
Unitary price elastic supply
Supply has unitary price elasticity when the percentage change in quantity supplied is exactly equal to the percentage change in price. The value of PES is 1.
How to read the graph: any supply curve that starts from the origin has a PES value of 1. This means price and quantity supplied change by the same proportion.
5. What affects price elasticity of supply?
| Factor | Effect on PES | Simple explanation |
|---|---|---|
| Spare capacity | More spare capacity = more elastic supply | Firms can produce more without major extra cost. |
| Stocks/inventories | More stocks = more elastic supply | If goods are already stored, firms can sell more quickly. |
| Time period | Long run = more elastic supply | Over time, firms can hire labour and buy machines. |
| Availability of resources | Easy access = more elastic supply | Materials and workers are easier to obtain. |
| Nature of the product | Slow-to-produce goods = more inelastic supply | For example, crops cannot be increased instantly. |
6. PES values to remember
- PES > 1: elastic supply
- PES < 1: inelastic supply
- PES = 1: unitary elastic supply
- PES = 0: perfectly inelastic supply
- PES = ∞: perfectly elastic supply
7. Easy exam method
- Write the formula: PES = % change in quantity supplied ÷ % change in price.
- Calculate both percentage changes.
- Divide carefully.
- Classify the answer: elastic, inelastic, unitary, perfectly elastic or perfectly inelastic.
- Explain why: mention spare capacity, time period, stocks or availability of resources.
Quick check
- If PES is 2, supply is elastic.
- If PES is 0.5, supply is inelastic.
- If PES is 1, supply is unitary elastic.
- If PES is 0, quantity supplied is fixed.
- Supply is usually more elastic in the long run than in the short run.