What is Price Elasticity of Supply?
The definition for PES is: How responsive quantity supplied is to a change in price.
Essentially, the Price Elasticity of Supply gives a unit to how much firms will increase or decrease the quantity a good or service they supply when price changes. PES will always be positive because price and quantity are proportional (The supply curve slopes upwards — As one increases, the other increases as firms want to maximise profits so they produce more when prices increase).
When PES is less than 1 this will indicate Price Inelastic Supply — Percentage change in price has led to a smaller percentage change in quantity supplied. When PES is greater than 1, supply will be elastic to a change in price — Percentage change in price has led to a larger percentage change in quantity supplied. If PES is 0 PES will be Unit Elastic — Percentage change in price is equal to percentage change in quantity supplied.
What determines the price elasticity of supply?
If stocks of finished goods are available, the supply will be relatively elastic because manufacturers will be able to respond quickly to a price change. The availability or cost of switching resources from one use to another use. An example of this is when resources, like labour, have specific skills or machinery that is highly specific, or it is expensive to reallocate resources from one use to another, then supply will be relatively inelastic. Short run (At least one factor of production is fixed) — It is difficult to change supply quickly in response to a price change in the short run making supply very inelastic.
Long Run PES
In the long run all factors of production are variable, therefore supply is likely to be more elastic because all resources are variable. There are many reasons for this that include:
- Number of producers: ease of entry into the market.
- Spare capacity: it is easy to increase production if there is a shift in demand.
- Ease of switching: if production of goods can be varied, supply is more elastic.
- Ease of storage: when goods can be stored easily, the elastic response increases demand.
- Length of production period: quick production responds to a price increase easier.
- Time period of training: when a firm invests in capital the supply is more elastic in its response to price increases.
- Factor mobility: when moving resources into the industry is easier, the supply curve is more elastic.
- Reaction of costs: if costs rise slowly it will stimulate an increase in quantity supplied. If costs rise rapidly the stimulus to production will be choked off quickly.
Price Elasticity of Supply in action:
If the price of bread increase, supply would increase by a larger percentage than the increase of bread. This is because it is relatively cheap to increase the factors of production of bread. Furthermore, it is easy to store bread as if it is vacuum-sealed, it can be stored for longer periods of time.
