👋 Welcome to the World of Price Elasticity of Supply (PES)!

Hello future economist! You’ve already learned about the Law of Supply (when price goes up, quantity supplied goes up). But how *much* does quantity supplied go up? That's what we need to measure!

This chapter, Price Elasticity of Supply (PES), is like measuring how quickly and easily producers can hit the 'accelerator' when prices change. This responsiveness is vital for understanding how resources are allocated in a market.

💡 Why PES Matters in Resource Allocation

If the price of pineapples suddenly doubles, producers need to decide whether it’s worth shifting resources (land, labour, machinery) from, say, banana farming, into pineapple farming. PES tells us how effective and fast this resource reallocation can be.

1. Defining Price Elasticity of Supply (PES)

Definition (Syllabus 2.8.1)

The Price Elasticity of Supply (PES) measures the responsiveness (or sensitivity) of the quantity supplied of a good or service to a change in its price.

In simple terms: If the price of iPhones rises by 10%, how much does Apple's production of iPhones increase?

Key Term:
Elastic Supply: Supply is responsive to price changes. A small change in price leads to a proportionately larger change in quantity supplied.
Inelastic Supply: Supply is unresponsive (or sluggish) to price changes. A large change in price leads to only a proportionately smaller change in quantity supplied.

2. Calculating and Interpreting PES (Syllabus 2.8.2)

The PES Formula

PES is calculated using the following ratio:

$$ \text{PES} = \frac{\text{\% Change in Quantity Supplied}}{\text{\% Change in Price}} $$

Quick Tip: Unlike Price Elasticity of Demand (PED), PES will almost always be positive because supply curves slope upwards (following the Law of Supply). You don't need to worry about negative signs here!

Interpreting the Result

The value you calculate tells you the degree of elasticity:

  1. PES > 1 (Elastic Supply)

    The percentage change in quantity supplied is greater than the percentage change in price.
    Example: Price rises 5%, Quantity Supplied rises 15%. PES = 15/5 = 3.
    This product is easy for firms to produce more of quickly.

  2. PES < 1 (Inelastic Supply)

    The percentage change in quantity supplied is less than the percentage change in price.
    Example: Price rises 10%, Quantity Supplied rises 2%. PES = 2/10 = 0.2.
    Firms find it difficult or slow to increase production.

  3. PES = 1 (Unitary Elastic Supply)

    The percentage change in quantity supplied is exactly equal to the percentage change in price.
    Example: Price rises 8%, Quantity Supplied rises 8%. PES = 1.

🛑 Common Mistake to Avoid!

Do not confuse "Elastic" (responsive) with "Large Quantity". A firm might supply a massive quantity (billions of units), but if they cannot increase that quantity easily when the price changes, their supply is inelastic. Elasticity is about the *change*, not the *level*.

3. Visualising PES on Supply Diagrams (Syllabus 2.8.2)

We can use the steepness (slope) of the supply curve to visually estimate elasticity:

a) Relatively Inelastic Supply (PES < 1)


The supply curve is relatively steep. Even a large change in price causes only a small change in quantity supplied.
Analogy: Imagine pushing a heavy, large rock (inelastic) – it moves very little even with a lot of force (price change).

b) Relatively Elastic Supply (PES > 1)


The supply curve is relatively flat. A small change in price leads to a large change in quantity supplied.
Analogy: Imagine pushing a skateboard (elastic) – a small amount of force sends it flying (large quantity response).

c) Extreme Cases of PES

i) Perfectly Inelastic Supply (PES = 0)


The supply curve is a vertical line. Quantity supplied never changes, regardless of the price.
Example: The supply of genuine antique paintings or tickets to a fixed-capacity stadium event (once all seats are sold). The number available cannot increase.

ii) Perfectly Elastic Supply (PES = infinity)


The supply curve is a horizontal line. At one specific price, producers are willing to supply any quantity; if the price drops even slightly, supply falls to zero.
Note: This is often theoretical, but represents firms in highly competitive markets where they must accept the market price.

4. Determinants of PES: What Makes Supply Elastic or Inelastic? (Syllabus 2.8.3)

The key influences on whether a firm’s supply is elastic or inelastic relate to how quickly and easily they can adjust their production level.

1. Time Period of Production

This is the most important determinant.

  • In the Short Run: Firms struggle to increase all factors of production (e.g., building a new factory takes time). Supply is often inelastic.
  • In the Long Run: Firms have enough time to acquire new machinery, build factories, hire and train new staff. Supply becomes more elastic.

Example: If the price of organic strawberries doubles tomorrow, a farmer can only increase supply slightly (short run). If the price stays high for a year, the farmer can buy new land and machinery, making supply much more responsive (long run).

2. Availability of Spare Capacity

Spare Capacity means the firm is not using all its existing resources (machinery, labour).

  • If a factory is running at 50% capacity, it has a lot of spare resources. Supply is elastic because they can ramp up production instantly without buying new equipment.
  • If a factory is running at 100% capacity, they cannot produce more quickly. Supply is inelastic.

3. Mobility of Factors of Production

How easily can factors (Land, Labour, Capital) be moved from one use to another?

  • If labour and machinery are mobile (e.g., a multi-purpose printing press can switch from printing magazines to printing books easily), supply is elastic.
  • If factors are immobile (e.g., highly specialised equipment or vineyard land), supply is inelastic.

4. Level of Stocks (Inventories)

Stocks are the goods a firm holds in storage (warehouses).

  • If a firm holds high stocks (inventories), they can respond instantly to a price rise by selling existing stock. Supply is elastic.
  • If a firm holds low or zero stocks (e.g., services, fresh fish), they must increase *production* to increase supply. Supply is more inelastic.

5. Complexity of Production/Inputs

Does the good require specialised, difficult-to-source inputs?

  • Producing a simple item using common materials (like a basic plastic toy) means supply is likely elastic.
  • Producing highly complex items, like microchips or specialised medicines, where inputs are scarce or regulated, means supply is inelastic.

5. Significance of PES (Syllabus 2.8.4)

Why do governments, consumers, and producers care about how responsive supply is?

A) Implications for Producers (Firms)

  • Pricing Power: If a firm knows its supply is elastic, it can quickly benefit from rising market prices by increasing output and market share.
  • Risk Management: Firms producing goods with inelastic supply (like agricultural crops) face high risks. A sudden boom in demand cannot be met, leading to extreme price volatility. If the price falls, they cannot quickly cut supply either.

B) Implications for Government and Consumers

PES is crucial when analysing how the market reacts to external shocks, like taxes or sudden demand shifts.

  • Responding to Demand Shocks:
    • If the supply of masks is inelastic during a pandemic, a surge in demand will cause the price to spike very high, hurting consumers.
    • If supply is elastic, producers can quickly increase quantity, limiting the rise in price.
  • Taxes and Subsidies: Government microeconomic policies often rely on knowing PES. If the government subsidises a product with elastic supply, the quantity supplied will increase significantly.
  • Resource Planning: Governments use PES to understand which industries can quickly expand (elastic supply) during periods of high economic growth and which require long-term investment (inelastic supply).
Did You Know?

The supply of non-renewable resources, like oil and certain rare minerals, is often highly inelastic in the short run. This means that if world demand for oil spikes, producers struggle to drill significantly more in the short term, causing huge price jumps, which can then slow down the global economy. This is a classic example of resource allocation challenges caused by inelastic supply.

✅ Quick Review PES Checkpoint

Key Concepts to Master
  • Definition: Responsiveness of quantity supplied to price change.
  • Formula: (% Change in Qs) / (% Change in P).
  • Elastic (PES > 1): Responsive, flat curve, high mobility/spare capacity/stocks.
  • Inelastic (PES < 1): Unresponsive, steep curve, low mobility/stocks, short time frame.
  • Significance: Determines how quickly resources can be reallocated and the degree of price volatility during demand/supply shifts.

You've made it through elasticity! Understanding PES gives you a powerful tool to analyse the speed and flexibility of production in any market. Keep practising those interpretations!