The definition and formula for price elasticity of supply (PES)

Price elasticity of supply (PES) measures how much the quantity supplied of a good or service changes in response to a change in its price. It shows the responsiveness of suppliers to price fluctuations.

PES is always positive because a higher price usually encourages greater supply. It has no units, as it is calculated as a ratio.

Formula for PES

$\text{PES}=\frac{\text{percentage change in quantity supplied}}{\text{percentage change in price}}$

Where:

• Percentage change in quantity supplied = $\frac{\text{new quantity supplied}-\text{old quantity supplied}}{\text{old quantity supplied}}\times 100$
• Percentage change in price = $\frac{\text{new price}-\text{old price}}{\text{old price}}\times 100$

Worked example - Calculating PES

When the price of a smartphone rises from £500 to £560, the quantity supplied increases from 20,000 to 26,000 units. Calculate the PES.

Step 1: Identify the values

• Old quantity supplied = 20,000 units
• New quantity supplied = 26,000 units
• Old price = £500
• New price = £560

Step 2: Calculate percentage change in quantity supplied

$\text{Percentage change in quantity supplied}=\frac{\mathrm{26,000}-\mathrm{20,000}}{\mathrm{20,000}}\times 100=30\%$

Step 3: Calculate percentage change in price

$\text{Percentage change in price}=\frac{560-500}{500}\times 100=12\%$

Step 4: Calculate PES

$\text{PES}=\frac{30\%}{12\%}=2.5$

Categories of PES and their meanings

PES can be grouped into different categories based on its value, each indicating how suppliers react to price changes.

Elastic supply (PES > 1)

A percentage change in price leads to a larger percentage change in quantity supplied. Suppliers can respond significantly to price rises by increasing output.

Inelastic supply (0 < PES < 1)

A percentage change in price results in a smaller percentage change in quantity supplied. Suppliers struggle to adjust output much when prices change.

Unit elastic supply (PES = 1)

The percentage change in quantity supplied matches the percentage change in price.

Perfectly elastic supply (PES = ∞)

Any drop in price reduces quantity supplied to zero. Suppliers only produce at or above a certain price level.

Perfectly inelastic supply (PES = 0)

Quantity supplied remains unchanged regardless of price fluctuations.

The difference between short-run and long-run PES

PES varies depending on the time frame, as firms need time to adjust their production.

Short run

This is the period when at least one factor of production is fixed, often capital like factories or machinery. Firms can hire more workers or buy extra materials, but expanding facilities takes time. As a result, supply is more price inelastic in the short run, making it hard to quickly switch production or boost output in response to price changes.

Long run

All factors of production are variable, allowing firms to increase capacity, such as building new plants. Supply becomes more elastic as firms have time to react to price and demand shifts. The length of the short run and long run differs by industry, depending on production times and equipment needs.

Factors that affect PES

Several elements influence how elastic supply is, beyond just time:

• Unemployment levels - During high unemployment, supply is more elastic because it is easier to recruit workers quickly.
• Perishability of goods - Perishable items, like fresh fruit, have inelastic supply since they cannot be stored for long periods.
• Stock levels - Firms with large inventories can respond elastically to price changes by drawing on existing stocks.
• Mobility of factors of production - Industries where resources like labour or capital can be easily reassigned have more elastic supply.
• Type of product - Agricultural goods are more inelastic in the short run due to growing cycles, while manufactured goods can often be scaled up faster.

The importance of high PES to firms and ways to improve it

A high PES is valuable for firms because it allows them to quickly adapt to price increases or rising demand, maximising opportunities. Firms benefit from elastic supply as it enables rapid increases in output when prices rise, helping them capture more market share and profits.

Measures to improve elasticity of supply

• Flexible working patterns - Using part-time or temporary staff to adjust workforce size easily.
• Latest technology - Investing in automation to speed up production changes.
• Spare production capacity - Maintaining extra facilities or equipment ready for quick expansion.