What is Price Elasticity of Supply?

Equation

% ∆ in Supply of Good X
% ∆ in Price of Good X

Values

PES > 1 = Elastic

This occurs when an increase in price leads to a bigger % increase in supply, this is because firms find it easy to increase production of a good in a given time period.


PES < 1 = Inelastic

This occurs when an increase in price leads to a proportionally smaller % increase in supply because it is difficult for firms to change production in a given time period.


PES = 0 = Perfectly inelastic

When PES is perfectly inelastic supply if fixed at a certain quantity and cannot possibly respond to a change in demand.


PES = Infinity = Perfectly elastic

When PES is perfectly elastic this means an increase in demand can be met without any change in price.

Determinants of Elasticity of Supply:

1) Time

The longer it takes to produce a good the inelastic the supply will be. Consider agricultural products, it will take at least six months to grow a fresh crop, therefore farmers cannot respond quickly to a change in price as they cannot suddently suppyl more goods


2) Stock Levels

If stocks of finished products are high then a firm is easily able to respond to a change in demand. If stocks are low, however, prices will be forced higher because of scarcity.


3) Ease of factor mobility

The easier it is to employ more labour or capital in the work place when prices rise, the higher the elasticity of supply. If a firm is unable to quickly employ more capital e.g. due to high cost then it will be more difficult to respond to an increase in price meaning price elasticity of supply is inelastic.


4) Resource input available

Firms have to gather the resource inputs (often raw materials) in order to produce the goods to supply to the market. However, these inputs may not be readily available upon request, it could take weeks or months to gather the resources needed to produce the goods. The longer it takes to gather the resource inputs the more inelastic the price elasticity of supply.