Price elasticity of supply
Key terms
Define each term.
Multiple choice
Circle the correct answer.
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:
Worked problems
Show your working.
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.
Diagrams
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.
Answers
Price elasticity of supply: A measure of the responsiveness of the quantity supplied of a good to a change in its price.
B. Increasing milk output requires expanding the herd, which takes years of breeding, so output cannot respond to a price rise in the short run. The other three can all raise output quickly, through spare capacity, released stock or additional labour respectively.
B. PES = 30 / 20 = 1.5, which exceeds 1 and is therefore elastic. The sign is positive because price and quantity supplied move in the same direction, unlike PED. Dividing the wrong way round gives 0.67 and is the commonest error.
Step 1. Calculate the percentage change in quantity supplied. Change = 9,200 - 8,000 = 1,200. Percentage change = (1,200 / 8,000) x 100 = 15%.
Step 2. Calculate the percentage change in price. Change = 2.50 - 2.00 = 0.50. Percentage change = (0.50 / 2.00) x 100 = 25%.
Step 3. Apply the formula. PES = 15 / 25 = 0.6.
Step 4. Classify the result. 0.6 lies between 0 and 1, so supply is price inelastic. Quantity supplied rose proportionately less than price, so growers could not fully exploit the higher price in the short run.
Step 5. Consider the longer period. Over two years growers can plant more, expand glasshouses and bring new land into production, so quantity would respond far more. PES would rise above 0.6 and probably above 1. Elasticity of supply is not a fixed property of a good; it depends on the time allowed for adjustment.
Always divide by the original value when computing percentage changes, and always state the classification rather than leaving a bare number. A calculation ending at 0.6 without the word inelastic usually loses the interpretation mark.
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.