The price of a rare metal doubles and mining output barely moves for three years, because opening a mine takes three years. The price of printed t-shirts doubles and supply floods in within a fortnight. Same price signal, completely different response, and the difference decides who actually gains from a price rise. Price elasticity of supply measures how quickly producers can react, and it explains why some markets absorb shocks smoothly while others lurch.
Price elasticity of supply
A measure of the responsiveness of the quantity supplied of a good to a change in its price.
PES = percentage change in quantity supplied / percentage change in pricePES is normally positive, because supply curves slope upward and price and quantity move together. This is the main arithmetical difference from PED, which is normally negative. Formulae are not printed in any 9708 paper, so recall it.
The value is interpreted against one. Supply is elastic when PES is greater than 1, meaning quantity responds proportionately more than price, and producers can react easily. It is inelastic when PES is between 0 and 1, so quantity responds proportionately less than price and producers are constrained. Unit elastic supply gives exactly 1. Two extreme cases matter: perfectly inelastic supply, PES of 0, where quantity cannot change at all, as with seats in a stadium on the night; and perfectly elastic supply, infinite PES, where any amount can be supplied at the going price and none at all above it.
Calculating and interpreting PES
The price of tomatoes rises from $2.00 to $2.50 per kilo. Quantity supplied rises from 8,000 to 9,200 kilos per week. Calculate PES, classify it, and state what would happen to the value if the same price rise were sustained for two years.
The determinants all reduce to how easily producers can change output. Time is the most important: supply is more elastic the longer the period allowed, since factors of production become adjustable. Spare capacity makes supply elastic, because a firm with idle machinery can increase output immediately. The availability of stocks matters, since a producer holding inventory can release it at once. Ease of switching production between goods raises elasticity, which is why a factory making one style of shirt can quickly make another. And the mobility of factors of production matters: where skilled labour or specialised equipment is hard to obtain, output cannot rise quickly whatever the price.
Almost every PES question can be answered through time and capacity, so start there. Agricultural goods are supply inelastic in the short run because crops take a season to grow, and manufactured goods with spare capacity are elastic because output can be raised at once. Naming the specific constraint in the scenario, rather than asserting that supply is inelastic, is what earns the explanation marks.
Draw three supply curves on separate diagrams: one perfectly inelastic (vertical), one perfectly elastic (horizontal) and one relatively inelastic (steep). On each, show a rise in demand and mark the resulting change in price and quantity.
The comparison is the point. With perfectly inelastic supply the entire increase in demand goes into price and none into quantity. With perfectly elastic supply it goes entirely into quantity and none into price. Real markets fall between, and where they fall determines whether a demand shock raises prices or output. This is the same reasoning used for tax incidence.
Which good is most likely to have the lowest price elasticity of supply in the short run?
Price rises by 20% and quantity supplied rises by 30%. PES is:
Test yourself on price elasticity of supply
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