The meaning and calculation of price elasticity of supply

Price elasticity of supply (PES) measures how much the quantity supplied of a product changes in response to a shift in its price.

PES values are typically positive because suppliers tend to offer more of a product when its price rises.

Formula for calculating PES

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

PES has no units and is not expressed as a percentage.

Worked example - Calculating price elasticity of supply

When the price of a laptop rises from £550 to £605, the quantity supplied increases from 12,000 to 16,800 units. Calculate the PES.

Step 1: Identify the values

• Original price = £550
• New price = £605
• Original quantity supplied = 12,000 units
• New quantity supplied = 16,800 units

Step 2: Calculate percentage change in quantity supplied

$\text{Percentage change in quantity supplied}=\frac{\mathrm{16,800}-\mathrm{12,000}}{\mathrm{12,000}}\times 100=\frac{\mathrm{4,800}}{\mathrm{12,000}}\times 100=40\%$

Step 3: Calculate percentage change in price

$\text{Percentage change in price}=\frac{605-550}{550}\times 100=\frac{55}{550}\times 100=10\%$

Step 4: Calculate PES

$\text{PES}=\frac{40\%}{10\%}=4$

Different types of price elasticity of supply

PES can vary depending on how responsive supply is to price changes, leading to several categories.

Elastic supply (PES > 1)

When PES exceeds 1, supply is elastic, meaning the percentage change in quantity supplied is greater than the percentage change in price.

For perfectly elastic supply, PES is infinity (∞), represented by a horizontal supply curve. Any price drop reduces quantity supplied to zero.

Inelastic supply (0 < PES < 1)

When PES is between 0 and 1, supply is inelastic, so the percentage change in quantity supplied is smaller than the percentage change in price.

For perfectly inelastic supply, PES is 0, shown as a vertical supply curve. Quantity supplied remains constant regardless of price changes.

Unit elastic supply (PES = 1)

When PES equals 1, supply has unit elasticity, where the percentage change in quantity supplied matches the percentage change in price exactly.

The importance of high PES to firms

Firms benefit from high PES because it allows them to adapt swiftly to price or demand fluctuations, helping maintain competitiveness and profitability.

Measures to improve elasticity of supply

• Flexible working patterns - Using part-time or temporary staff to scale production easily.
• Latest technology - Investing in efficient tools to speed up output without major cost increases.
• Spare production capacity - Maintaining extra facilities or equipment ready for quick expansion.

Short-run and long-run supply elasticity

The elasticity of supply differs between time periods due to constraints on production factors.

Supply elasticity in the short run

In the short run, at least one factor of production is fixed, limiting capacity. Firms cannot easily expand, making supply more inelastic.

Supply elasticity in the long run

In the long run, all factors of production are variable, allowing firms to increase capacity fully. This makes supply more elastic, as there is ample time to respond to price or demand changes.

The length of the short run and long run varies by industry.

Factors that affect PES

Several elements influence how elastic supply is for a product, affecting suppliers' ability to respond to price changes.

Key factors influencing PES

• Time periods and production type - Agricultural goods have more inelastic supply in the short run than manufactured items.
• Unemployment levels - High unemployment makes supply more elastic, as firms can easily hire additional workers to expand production.
• Perishability of goods - Perishable items like fresh produce have inelastic supply because they cannot be stored long-term.
• Stock levels - Firms with large inventories can increase supply quickly, leading to more elastic PES.
• Mobility of factors of production - Industries with easily expandable resources tend to have more elastic supply.