What price elasticity of supply measures
Price elasticity of supply (PES) measures how responsive the quantity supplied of a good is to a change in its price. It compares the percentage change in quantity supplied with the percentage change in price.
Key idea
PES = percentage change in quantity supplied / percentage change in price. Because supply curves normally slope upward, the value is positive.
Reading the value
If PES is greater than 1, supply is price elastic: producers can raise output easily when price rises. If PES is between 0 and 1, supply is price inelastic: output responds only a little. A vertical supply curve is perfectly inelastic (PES = 0), meaning quantity cannot change at all.
Example
The price of a manufactured toy rises by 20 per cent and quantity supplied rises by 30 per cent. PES = 30 / 20 = 1.5, so supply is elastic.
What determines PES
- Time: supply is more elastic in the long run, when firms can build capacity and change methods.
- Spare capacity: if a firm has unused machines and workers, it can raise output quickly.
- Stocks: if goods can be stored, supply can respond faster to price changes.
- Factor mobility: if labour and other resources can move easily into the industry, supply is more elastic.
Remember
- Agricultural goods often have inelastic supply in the short run because crops take time to grow.
- Manufactured goods with spare capacity tend to have more elastic supply.
- PES is never negative for a normal upward-sloping supply curve.