PRICE

ELASTICITY
OF SUPPLY
(Pes)
Short notes for economics
 PRICE ELASTICITY OF SUPPLY (PES)
Definitions of PES
Price elasticity of supply (PES) is the responsiveness of the
quantity supplied of a good or service to a change in its price.

Calculating PES (fomula)

Interpreting PES (types of pes)

 Elastic supply
This is when the smaller percentage change in price results
in greater percentage change in supply. PED is greater than
1.

supply

 Inelastic supply
This is when a greater percentage change in price results in
a smaller percentage change in supply. PED is less than 1 but
greater than 0.
 Unitary
This is when the percentage change in price is equal to the
percentage change in quantity supplied. PED=1

 Perfectly elastic supply

This occurs when a change in price has no effect on supply.
PED=∞

 Perfectly inelastic supply

This occurs when price remains unchanged but supply
changes. The value of PED = 0.
Factors influencing PES
1. The number of substitutes
Large number of substitutes – Elastic supply
Small number of substitutes – Inelastic supply
2. Proportion of income
High Proportion – Elastic supply
Low Proportion – Inelastic supply

3. Necessity or luxury product

Luxury product – Elastic supply
Necessity product – Inelastic supply

4. Time period
Long run – Elastic supply
Short run – Inelastic supply

5. Postponement of consumption
Postponement in purchase and consumption - elastic
No postonment in purchase and consumption - inelastic

PED and total revenue

There is a relationship between PED and total spending and
total revenue gained.

 If supply is elastic, a rise in price will cause a fall in

revenue because the quantity supplyed will fall by more
than the rise in price in percentage terms.

 If supply is inelastic, a rise in price will cause a rise in

revenue because the quantity supplyed will fall by less
than the rise in price in percentage terms.

 If supply is unitary, a rise in price will leave total revenue

unchanged as the proportionate change in quantity
supplyed and price will be the same.

Significance of PED for decision making

 To consumers
If supply is elastic, consumers are more likely to benefit from
lower price and higher quality because producers would be
reluctant to raise price as supply would contract by a greater
percentage and revenue would fall.

 To producers
If PED is elastic, a price reduction will increase revenue
because supply will rise by more than price. If PED is
inelastic, a price rise will increase revenue. This is because
supply will fall by less than price.

 To the government
1. Knowledge of PED would help a government estimate how
much tax revenue it may earn from indirect taxes.

2. Knowledge of PED may help a government to estimate

how much of a subsidy to give.

3. Knowledge of PED may influence the price the

government charges for the products it supplies.