2.7. Price elasticity of supply (PES)
- Syllabus
- 0455–2027–2028
- Topic
- 2.7
- Level
- —
Learning objectives
2.7.1Definition of PES• Definition of PES2.7.2Calculation of PES• calculation of PES using the formula• interpretation of the significance of the PES value: perfectly inelastic, inelastic, unitary, elastic, perfectly elastic• drawing and interpretation of supply curve diagrams to show different PES2.7.3Determinants of PES• main influences on whether supply is elastic or inelastic
Measure supply responsiveness with PES
Price elasticity of supply (PES) measures how responsive quantity supplied is to a change in the product's own price, with other supply conditions unchanged.
PES compares percentage changes, so responsiveness can be compared across products measured in different units. If quantity supplied changes by a larger percentage than price, supply is elastic; if it changes by a smaller percentage, supply is inelastic.
Along a normal upward-sloping supply curve, price and quantity supplied move in the same direction, so PES is normally positive. A high PES means producers can adjust output strongly; a low PES means production constraints limit the response.
PES measures a movement along the existing supply curve caused by the product's own price. A change in costs, technology, taxes or weather shifts supply and is not the price response measured by PES.
Calculate and classify PES
PES = \frac{%\ change\ in\ quantity\ supplied}{%\ change\ in\ price}
Calculate each percentage change from its original value, then divide the quantity percentage by the price percentage. If price rises by 10% and quantity supplied rises by 15%, PES=15%/10%=1.5, so supply is elastic.
| PES value | Interpretation | Supply-curve form |
|---|---|---|
| 0 | perfectly inelastic: quantity supplied does not respond | vertical |
| between 0 and 1 | inelastic: quantity changes by a smaller percentage | relatively steep over a comparable range |
| 1 | unitary: equal percentage changes | straight line through the origin if unitary throughout |
| greater than 1 | elastic: quantity changes by a larger percentage | relatively flat over a comparable range |
| ∞ | perfectly elastic: producers supply at one price only | horizontal |
The formula can recover a quantity response. If PES=2 and price falls by 10%, quantity supplied changes by 2×(−10%)=−20%. Price and quantity supplied fall together along the curve.
Do not classify PES from visual steepness unless axes and scales are comparable. Slope uses absolute changes; PES uses percentage changes and can vary along one straight supply curve that does not pass through the origin.
Explain what determines PES
Supply is more price-elastic when producers can release stocks or expand production quickly and at manageable cost. It is more inelastic when capacity, time or resources prevent a rapid response.
| Influence | More elastic when... | Why quantity supplied responds more |
|---|---|---|
| stocks | firms hold unsold finished goods | stocks can be released when price rises |
| storage | the product is durable and inexpensive to store | sales can be moved between periods |
| spare capacity | labour and equipment are underused | output can rise without building new capacity |
| production time and complexity | production is short and simple | extra units can reach the market quickly |
| time period | producers have longer to adjust | fixed factors can be changed and capacity expanded |
| factor mobility and availability | labour, capital and materials can move into production | resources can respond to the higher price |
| adjustment cost | changing output is relatively inexpensive | expansion is more feasible |
New houses and ships tend to be inelastic in supply in the short run because construction takes time, uses specialised resources and cannot be supported by large finished stocks. A storable product made quickly with spare capacity is more likely to have elastic supply.
PES often rises over time. For example, a crop cannot expand immediately if new plants take years to mature, but producers may plant more, obtain equipment and reorganise resources before the long run.
These influences work together and apply for a stated time period. A high price alone does not make supply elastic; elasticity depends on producers' ability to change quantity supplied in response to that price change.