Price Elasticity of Supply

This measures the responsiveness of quantity supplied to a change in price.

formula-pes

The price elasticity of supply (PES) is measured by % change in Q.S / % change in price.

  • If price of a cappuccino increases 10%, and the supply increases 20%. We say the PES is 2.0
  • If the price of bananas falls 12% and the quantity supplied falls 2%. We say the PES = 2/12 = 0.16

 

Inelastic supply

This means that an increase in price leads to a smaller % change in demand. Therefore PES <1
inelastic-supply

 

Supply could be inelastic for the following reasons

  • Firms operating close to full capacity.
  • Firms have low levels of stocks, therefore there are no surplus goods to sell
  • In the short term, capital is fixed in the short run e.g. firms do not have time to build a bigger factory.
  • If it is difficult to employ factors of production, e.g. if highly skilled labour is needed
  • With agricultural products supply is inelastic in the short run, because it takes at least six months to grow crops, in September the farmer cannot suddenly produce more potatoes if the price goes up.

More on: inelastic supply

Elastic supply

This occurs when an increase in price leads to a bigger % increase in supply, therefore PES >1

elastic-supply

  •  In this case, PES = 60% / 11% = 5.45

Supply could be elastic for the following reasons

  • If there is spare capacity in the factory.
  • If there are stocks available.
  • In the long run supply will be more elastic because capital can be varied.
  • If it is easy to employ more factors of production.

Question on price elasticity of supply equation

  • If the PES is 2.0 for CDS: and the firm supplied 4,000 when the price was £30.

Q. If the price increased from £30 to £36, what will be the new Q?

  • QS increases by 6, therefore as a % 6/30 = 0.2 = 20%
  • 2.0 = % change in QS /20
  • 40 = % change in QS
  • Therefore new Q = 4000 *140/100 = 5,600

Related pages