Price elasticity of supply

DEFINITION
measures the relationship between change in quantity
supplied following a change in price.
EXPLAINATION

 If supply is elastic (i.e. PES > 1), then producers can

increase output without a rise in cost or a time delay
 If supply is inelastic (i.e. PES <1), then firms find it hard to change
production in a given time period.

What is the formula for calculating price elasticity of supply?

The formula for price elasticity of supply is:

Percentage change in quantity supplied divided by the percentage

change in price

 When Pes > 1, then supply is price elastic

 When Pes < 1, then supply is price inelastic
 When Pes = 0, supply is perfectly inelastic
 When Pes = infinity, supply is perfectly elastic following a change in
demand

An elastic supply curve

What factors affect the elasticity of supply?

1. Spare production capacity: If there is plenty of spare

capacity then a business can increase output without a rise in costs
and supply will be elastic in response to a change in demand. The
supply of goods and services is most elastic during a recession, when
there is plenty of spare labour and capital resources.
2. Stocks of finished products and components: If stocks of raw
materials and finished products are at a high level then a firm is able
to respond to a change in demand - supply will be elastic. Conversely
when stocks are low, dwindling supplies force prices higher because
of scarcity
3. The ease and cost of factor substitution/mobility: If both capital
and labour are occupationally mobile then the elasticity of supply
for a product is higher than if capital and labour cannot easily be
switched. E.g. a printing press which can switch easily between
 printing magazines and greetings cards. Or falling prices of cocoa
encourage farmers to switch into rubber production
4. Time period and production speed: Supply is more price elastic
the longer the time period that a firm is allowed to adjust its
production levels. In some agricultural markets the momentary
supply is fixed and is determined mainly by planting decisions made
months before, and also climatic conditions, which affect the
production yield. In contrast the supply of milk is price elastic because
of a short time span from cows producing milk and products reaching
the market place.

Determinants of PES
How firms respond to changes in market conditions, especially price, is an
important consideration for the firm itself, and to an understanding of how
markets work.
The key considerations are:

1. Are resource inputs readily available?

2. Are factors mobile - are workers prepared to move to where they are
needed?
3. Can finished products be easily stored, and are there existing stocks?

Is production

4. running at full capacity?

5. How long and complex is the production cycle or production process?

Improving PES
Because a high PES is desirable, it may be necessary for firms to
undertake actions that improve their ability to respond quickly to changes in
market conditions. Examples of these actions include:

1. Creating spare capacity

2. Using the latest technology
3. Keeping sufficient stocks
4. Developing better storage systems
5. Developing better distribution systems
6. Providing training for workers
7. Having flexible workers who can do a range of jobs
8. Locating production near to the market
9. Allowing inward migration of labour if there is a labour shortage