2.17 - Price Elasticity of Supply (PES)
Meaning and calculation of PES
Price elasticity of supply (PES) measures how responsive the quantity supplied of a good or service is to a change in its price. It reflects the positive relationship between price and quantity supplied, as outlined in the law of supply, meaning PES is always a positive value.
Formula for calculating PES
Where:
- %ΔQs = Percentage change in quantity supplied
- %ΔP = Percentage change in price
This can also be expressed using actual values as:
Where:
- Q1 = Initial quantity supplied
- Q2 = New quantity supplied
- P1 = Initial price
- P2 = New price
PES values range from zero to infinity.
Worked example - Calculating PES
A firm supplies 400 units of a product at a price of £20 per unit. When the price rises to £22 per unit, the quantity supplied increases to 480 units. Calculate the PES.
Step 1: Identify the values
- Q1 = 400 units
- Q2 = 480 units
- P1 = £20
- P2 = £22
Step 2: Apply the PES formula
Step 3: Perform the calculation
Step 4: Interpretation
A PES of 2.0 indicates that supply is price elastic, as the percentage change in quantity supplied is greater than the percentage change in price.
Different values of PES and their meanings
The value of PES indicates the degree of responsiveness of supply to price changes.
Categories of PES values
- Price elastic supply (PES > 1) - The percentage change in quantity supplied is greater than the percentage change in price.
- Price inelastic supply (0 < PES < 1) - The percentage change in quantity supplied is smaller than the percentage change in price.
- Unit elastic supply (PES = 1) - The percentage change in quantity supplied equals the percentage change in price.
- Perfectly elastic supply (PES → ∞) - A small change in price leads to an infinitely large change in quantity supplied.
- Perfectly inelastic supply (PES = 0) - A change in price results in no change in quantity supplied.
Shapes of supply curves based on PES
The shape of a supply curve visually represents the PES value, showing how quantity supplied changes with price.
Characteristics of supply curves by PES value
- Price elastic supply - The supply curve S is relatively flat and must intersect the vertical axis. A rise in the price per unit from P1 to P2 lifts the quantity supplied per period from Q1 to Q2, a proportionately much larger change than the price change.
- Price inelastic supply - The supply curve S is steep and must intersect the horizontal axis. The same rise in price from P1 to P2 moves the quantity supplied only from Q1 to Q2, a proportionately smaller change than the price change.
- Unit elastic supply - The supply curve S passes through the origin, so a rise from P1 to P2 brings an exactly matching proportionate rise from Q1 to Q2, and the same holds anywhere along the curve.
- Perfectly elastic supply - The supply curve S is a straight horizontal line at the price P. Producers will supply any quantity at P and nothing at all below it.
- Perfectly inelastic supply - The supply curve S is a straight vertical line at the quantity Q, so the quantity supplied stays at Q whether the price is P1 or P2.
The five diagrams below show these cases in order, each with the price per unit (P) on the vertical axis and the quantity supplied per period (Q) on the horizontal axis.
Time periods and their impact on PES
In economics, time is divided into distinct periods that affect how easily suppliers can adjust output, influencing PES. Supply generally becomes more elastic over longer timeframes as more adjustments become possible.
Time periods in relation to PES
- Momentary run (market period) - All factors of production are fixed, with no adjustments possible, resulting in perfectly inelastic supply (PES = 0). Supply S is vertical, so an increase in demand from D1 to D2 falls entirely on price, which rises from P1 to P2 while the quantity supplied stays at Q.
- Short run - At least one factor of production is fixed (e.g., capital), but some adjustments can occur, leading to price inelastic supply (0 < PES < 1). Supply S is steep, so the same increase in demand from D1 to D2 raises the quantity supplied from Q1 to Q2 as well as the price from P1 to P2, but the rise in price is proportionately the greater of the two.
- Long run - All factors of production are variable, allowing full adjustments, which makes supply price elastic (PES > 1). Supply S is flat, so an increase in demand from D1 to D2 is met mainly by extra output, taking the quantity supplied from Q1 to Q2 while the price rises only slightly from P1 to P2.
The first three diagrams below show an increase in demand in each of the three periods. The fourth gathers the same idea into one fan of supply curves drawn through a single price P and quantity Q: as the time available lengthens, the supply curve flattens in turn from the vertical S1, through S2, S3 and S4, to the horizontal S5.
Factors influencing price elasticity of supply
Several factors determine how elastic supply is, affecting how quickly and easily firms can respond to price changes.
Key factors affecting PES
- Time available - Supply becomes more elastic over time as firms can make greater adjustments.
- Mobility of labour - If labour is occupationally or geographically immobile, supply is more inelastic.
- Spare capacity - Firms with unused production facilities can increase output easily when prices rise, leading to more elastic supply.
- Labour skill requirements - Industries needing unskilled labour have more elastic supply, as workers are easier to find compared to those requiring specialised skills.
- Storage capability - Goods that can be stored have more elastic supply than perishable items.
- Production time lags - Short production processes result in more elastic supply than lengthy ones.
- Cost structure - Industries where marginal costs rise quickly with increased output tend to have more inelastic supply.
- Type of product - Primary commodities generally have lower PES than manufactured products due to longer production times.