Price elasticity of supply (PES)

PES indicates how the quantity supplied responds to changes in price. To calculate PES we use the formula ‘percentage change in quantity supplied over percentage change in price’.

Price elasticity of supply

Using this supply schedule we can calculate PES over a range of supply. For example. PES over the range price 3 to 4. In this case, PES is 1 over the whole range.

Price elasticity of supply schedule
Price elasticity of supply

The value is equal to 1 at any point on a linear supply curve coming out of the origin.

Price elasticity of supply

Linear supply curves that start from the y-axis, and slope upwards have a PES value greater than 1 - or elastic.

Linear supply curves that start from the x-axis, and slope upwards have a PES value less than 1 - or inelastic.

Determinants of price elasticity of supply

Several factors can make supply more or less elastic, including:

  1. The availability of raw materials - greater availability leads to an increased ability to supply.
  2. The availability of labour - if labour is in short supply elasticity of supply will be lower.
  3. The extent to which labour can be reduced - if labour is heavily unionised, or there is strict legislation regarding firing and firing of labour, it might not be possible to reduce supply in response to a price drop.
  4. Whether stocks of finished products or raw materials are available - greater availability means a faster response to changes in market price.
  5. Whether there the firm has spare capacity - with spare capacity, production can be quickly increased as a response to higher prices.
  6. The timeframe being considered - supply will be much more elastic in the long run compared with the short run.

Summary


PES determinants
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