Price Elasticity of Supply (PES) (Copy)

Definition of PES

• Price Elasticity of Supply (PES): Measures the responsiveness of quantity supplied to a change in price.
• Formula:
  PES = (% change in quantity supplied) ÷ (% change in price)
• PES is always positive because the relationship between price and supply is direct (higher prices usually encourage more supply).

Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course

Calculation of PES

• If PES > 1 → Elastic Supply (quantity supplied changes by a larger percentage than price).
• If PES < 1 → Inelastic Supply (quantity supplied changes by a smaller percentage than price).
• If PES = 1 → Unitary Elastic Supply (percentage change in quantity supplied equals percentage change in price).
• If PES = 0 → Perfectly Inelastic Supply (supply does not respond to price at all).
• If PES = ∞ → Perfectly Elastic Supply (any small change in price leads to an infinite change in quantity supplied).

Example Calculation

• Price rises by 10%
• Quantity supplied rises by 20%
• PES = 20 ÷ 10 = 2 → Elastic supply

Determinants of PES

1. Time Period
   • Short run: supply is usually inelastic (limited ability to increase production).
   • Long run: supply becomes more elastic (firms can expand capacity, new firms enter).
2. Spare Production Capacity
   • If firms have unused resources, supply is elastic.
   • If operating at full capacity, supply is inelastic.
3. Stock Levels
   • If producers hold large inventories, they can respond quickly to price changes → elastic.
   • If stocks are low, supply is inelastic.
4. Availability of Factors of Production
   • If factors like labour, land, and capital are easily available, supply is elastic.
   • Scarcity of resources makes supply inelastic.
5. Ease of Switching Production
   • Firms that can switch production between products quickly have more elastic supply.
6. Nature of the Product
   • Agricultural products: often inelastic in the short run (time needed for crops to grow).
   • Manufactured goods: often more elastic.

Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course

Diagrams of PES

Elastic vs. Inelastic Supply

Price
 │
 │            /
 │           /
 │          /
 │         /
 │        /
 │       /
 │
 │--------------------------- Quantity
        Elastic Supply (flatter curve)

Price
 │
 │          |
 │          |
 │          |
 │          |
 │          |
 │          |
 │
 │--------------------------- Quantity
       Inelastic Supply (steeper curve)

Perfectly Inelastic vs. Perfectly Elastic Supply

Price
 │
 │     |
 │     |
 │     |
 │     |
 │     |
 │     |
 │
 │--------------------------- Quantity
  Perfectly Inelastic Supply (PES = 0)

Price
 │
 │
 │---------------------------- Supply
 │
 │
 │
 │
 │
 │--------------------------- Quantity
  Perfectly Elastic Supply (PES = ∞)

Significance of PES

For Consumers

• If supply is elastic, consumers benefit from stable prices even when demand rises.
• If supply is inelastic, consumers face steep price increases when demand rises.

For Producers

• Helps producers plan pricing strategy.
• If supply is elastic, producers can quickly respond to market opportunities.
• If supply is inelastic, producers may miss out on extra revenue during high demand.

For Governments

• Important when setting indirect taxes and subsidies.
• If supply is elastic, a subsidy will increase production significantly.
• If supply is inelastic, subsidies may not boost output much.

Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course