2.3 Price elasticity of supply
- Syllabus
- 9708–2026–2027
- Topic
- 2.3
- Level
- AS
Learning objectives
2.3.1Price elasticity of supply• Definition of price elasticity of supply (PES)2.3.2PES formula• Formula for and calculation of price elasticity of supply2.3.3PES coefficient• Significance of relative percentage changes, the size and sign of the coefficient of price elasticity of supply2.3.4PES determinants• Factors affecting price elasticity of supply2.3.5PES and firm response speed• Implications for speed and ease with which firms react to changed market conditions
What price elasticity of supply measures
Price elasticity of supply (PES) measures how responsive quantity supplied is to a change in the product's own price. It compares the percentage change in quantity supplied with the percentage change in price, other supply conditions unchanged.
A large PES means producers can change output proportionally more than price changes; a small PES means production constraints keep the quantity response proportionally smaller. PES is unit-free because it compares two percentages.
PES is not the change in supply caused by a tax, technology or demand shift. It measures movement in quantity supplied in response to the good's own price, along the relevant supply relationship.
Calculate price elasticity of supply
PES=\frac{%\Delta Q_s}{%\Delta P}
If price rises by 12% and quantity supplied rises by 18%, PES=18/12=1.5. Quantity responds proportionally more than price, so supply is elastic over this change.
The formula can also recover output. If PES is 0.5 and price rises from 10to12, price rises by 20%, so quantity supplied rises by 0.5×20%=10%. Starting from 100 units, new output is 110 units.
Use percentage changes in both parts and follow the percentage-change method specified by the question. Do not use the absolute slope ΔQs/ΔP and call it PES; PES has no units.
Interpret the PES coefficient
PES is normally positive because a higher own price gives firms an incentive to supply more. The sign shows direction; the coefficient size compares the relative percentage response of quantity supplied with the percentage price change.
| PES value | Description | Response meaning | Simple limiting supply shape |
|---|---|---|---|
| 0 | Perfectly inelastic | Quantity supplied does not change | Vertical |
| 0<PES<1 | Inelastic | Quantity changes proportionally less than price | Not identified by steepness alone |
| PES=1 | Unitary | Quantity and price change by the same percentage | Depends on curve/location |
| PES>1 | Elastic | Quantity changes proportionally more than price | Not identified by steepness alone |
| PES=∞ | Perfectly elastic | Supply is available at one price but not below it | Horizontal |
PES=0.4 is inelastic; PES=1.3 is elastic. Meaningful comparisons must use the same time horizon and market definition because both can change producers' ability to respond.
A horizontal supply curve is perfectly elastic, not perfectly inelastic. Visual steepness alone is not a safe elasticity measure unless scales and position are controlled.
What makes supply more or less elastic?
PES is higher when producers can increase or reduce quantity without long delays or sharply rising costs. It is lower when production, storage or input constraints bind.
| Factor | More elastic when... | Why |
|---|---|---|
| Time period | More time is available | Inputs, capacity and market entry can adjust |
| Spare capacity | Idle labour or equipment exists | Output can rise without first building capacity |
| Stocks and storage | Finished goods can be stored and released | Sales can change before new production is complete |
| Perishability | Goods or inputs are less perishable | Stock can bridge demand changes |
| Input mobility/availability | Labour, raw materials and capital are accessible and transferable | Bottlenecks are easier to relax |
| Production period | Output can be completed quickly | Firms can respond within the relevant market period |
| Entry and exit | Firms can enter or leave easily | Market capacity adjusts more in the long run |
Hotel rooms are almost fixed tonight, but supply can become more elastic over years as buildings and firms enter. A large stock of machinery alone is not enough if planning permission, specialist labour or raw materials remain fixed.
Determinants work together. One flexible factor does not guarantee elastic supply when another essential input forms the binding constraint.
What PES implies for firms facing market change
PES indicates the speed and ease with which firms can translate a price incentive into changed quantity supplied. It therefore helps predict whether a market change produces a large output response or stronger price pressure.
| If supply is... | Firm response after demand and price rise | Likely market implication | Operational focus |
|---|---|---|---|
| More elastic | Output can expand relatively quickly and strongly | More adjustment occurs through quantity; price pressure is moderated | Use stocks, overtime, flexible inputs or scalable capacity |
| More inelastic | Output changes little within the relevant period | More adjustment occurs through price and possible shortage pressure | Plan capacity, secure scarce inputs, manage queues/contracts or allow more time |
A meal service with available staff and ingredients may add output within hours. An oil exploration project may need years before additional investment produces output. The second can face a sustained price rise with little short-run quantity response even if firms want to expand.
PES is about changing quantity supplied, not the firm's freedom to set price. It also does not by itself determine profit: costs, the demand response, competition and the duration of the change still matter.