Price Elasticity of Supply (PES)

Lesson Objectives
By the end of this lesson you will:

Understand the concept of price elasticity of supply

Know the formula for calculating PES and be able to

use this formula

Be able to describe the determinants of PES

PES: a definition
Price

Elasticity of Supply (PES) may be

defined as:
the

relationship between the proportionate

changes in price and the proportionate
change in quantity supplied

Calculating Price Elasticity of Supply (PES)

PES = % Change in quantity supplied

% change in price

Working out the % change

% change =

Absolute change
Original value

X 100

Price Elasticity of Supply

Most

products have either elastic or inelastic

supply.

Elastic

supply is when a % change in price

causes a greater % change in supply.

Inelastic

supply is when a given % change in

price causes a smaller % change in supply.

Elastic Supply
Price

Elastic: Elasticity between 1 and

meaning

that the % change in supply is

greater than % change in price.

Inelastic Supply
Price

Inelastic: Elasticity between 0 and 1

meaning

that the % change in supply is less

than % change in price.

Perfectly Elastic Supply Curve

Perfectly

Elastic: Elasticity =

Producer

are prepared to supply all they

can obtain at some given price but none at
all at a higher price

Perfectly Inelastic Supply Curve

Perfectly
The

Inelastic: Elasticity = 0

quantity supplied does not change at all

as the price changes

Unitary Elasticity of Supply

Unitary
The

elasticity: Elasticity = 1

quantity supplied changes at exactly

the same % as does the price

Determinants of the degree of PES

The

extent to which supply is elastic

depends upon the flexibility and mobility
of the factors of production.

If

production can be expanded easily

and quickly and/or products can easily
be bought out of storage supply will be
elastic. If not it will be inelastic.

Availability of substitutes

This does not mean consumer substitutes but

producer substitutes.

These are defined as goods which a producer can

produce as alternatives.

E.g. Cadburys can easily switch its production lines between

producing various chocolate bars

If a product has many substitutes then producers can

quickly and easily alter the pattern of production as
prices rise/fall. Hence price elasticity of supply will be
high.

The level of spare capacity in the industry

In

an industry which is operating below

full capacity there will be unemployed
resources. In such a situation supply
will be elastic.

The

industry will be able to expand

production fairly easily and take
advantage of the previously idle fixed
assets.

The level of unemployment

Linked to spare capacity (see previous slide).

When there is full employment the supply of most

goods and services will be inelastic.

Supply could be increased by improved productivity

but in the short run no significant increases in output
will be possible.

In a domestic market supply ma be more elastic if it is

possible to import supplies from other countries.

Ability to store the product

Supply

will be elastic if the product can

be stored.

A rise

in price will see a rapid increase in

the supply due to drawing on stocks.

If

price falls supply can be reduced by

adding to stocks.

Whether the products are agricultural or manufactured ones

For

agricultural products supply in the

short run is inelastic. This is because supply
in one year is governed by what was planted
in the previous year.

Some

products (such as coffee take several

years for newly planted trees to reach
maturity)

A similar

argument applies for beef and milk.

Whether the products are agricultural or manufactured ones

The

supply of manufactured products tend to

be more elastic.

The

production process is usually shorter so

supply can be increased far quicker.

Of

course some products have much longer

production periods than others (it takes far
longer to produce a Boeing 747 than it does to
turn out a washing machine)

The time it takes to increase capacity

In

some industries expanding capacity

takes a very long time. These industries
will have inelastic supply.

Examples

would include mining and oil

or mineral extraction (due to the time
needed to sink new mines)

PES and time

Time

is a particularly important influence

on PES.

When

considering time economists tend

to focus on three periods
The

momentary period
The short run
The long run

The momentary period

This

is the period of time during which supply

is restricted to the quantities actually available
in the market at the moment.

At

this period supply is fixed (perfectly

inelastic)

Normally

this period will be very short (e.g. the

supply of newspapers to an area on a day)

The short run

The

short run is the interval which must elapse

before more can be supplied with the existing
capacity.

There

will be at least one fixed factor of

production

The

short run in some industries will be very

short (such as clothing) but in others (such as
house building) it will be many months.

The long run

The

long run is defined as the time interval

which is long enough to change the quantity of
all of the factors of production employed.

This

would include building an extension to a

factory, installing an expensive new machine
and so on.

It

would also include new firms entering an

industry.