2.3 Price elasticity of supply

Price elasticity of supply (PES) measures the percentage change in quantity supplied divided by the percentage change in the good’s own price.

A positive PES is usual because a higher price gives firms an incentive to supply more, but the response depends on spare capacity, stocks and how quickly inputs can adjust.

If price rises and firms can quickly add shifts, quantity supplied may respond strongly; a harvest crop with fixed output in the short run is less responsive.

PES concerns producers’ response to price, not consumers’ response to income or a shift in demand.

PES = % change in quantity supplied / % change in price. Substitute percentage changes consistently and report the coefficient with its interpretation.

For a finite change use the method specified by the question; the midpoint method can avoid endpoint bias. Keep the sign and units clear, although PES is often positive.

A 12% price increase causing an 18% rise in quantity supplied gives PES = 1.5, an elastic supply response.

Do not use the absolute change in output over the absolute change in price and call it PES; elasticity is a percentage ratio.

The PES sign shows whether quantity supplied moves with price; the absolute size shows how strongly. PES greater than one is elastic, equal to one unitary and below one inelastic.

A coefficient of 0.2 means output changes proportionally less than price; 2.0 means output changes proportionally more. Perfectly inelastic supply is vertical and perfectly elastic supply horizontal in the simple diagrams.

PES = 0.4 indicates an inelastic response, while PES = 1.3 indicates an elastic response.

Do not compare PES magnitudes without checking that the same time horizon and market definition are being used.

Supply tends to be more elastic when firms have spare capacity, can store goods, access mobile inputs, use flexible production methods or have a longer time to adjust.

Perishable goods, fixed land or specialist skills can make short-run supply inelastic. The market’s ability to attract new firms also affects long-run response.

Hotel rooms are nearly fixed tonight but new rooms can be built over years, so supply is more elastic in the long run.

A large stock of machinery does not guarantee elastic supply if skilled labour or raw materials remain fixed.

The speed and ease with which firms can change output determine how responsive supply is to a price change. Spare capacity, stocks, flexible inputs and easy entry raise PES.

A perishable crop or a fully occupied factory may be inelastic in the short run; storage, overtime or new firms can make the response more elastic later.

Concert seats available tonight are fixed, but a manufacturer can expand output over months by hiring and installing equipment.

A firm’s ability to change price is not the issue in PES; the issue is how quickly it can change quantity supplied.