PRICE ELASTICITY OF SUPPLY:

The Price Elasticity of Supply(P.E.S) can be defined as the measure of the degree of responsiveness
of the quantity supplied of a given product to changes in price of the same given product alone.

So in other words what happens to the quantity supplied of a product if or when there is a change in
the price of the said product.

In order to calculate the P.E.S the following formula is used:

***note that the triangle in the above formula stands for “DELTA”

DELTA is simply a term used in mathematics to signify or represent the word change, if the above
confuses you: it can be simplified in the following ways: where

P.E. S=change in quantity supplied/change in price X Price/Quantity**

OR JUST:

P.E. S=change in quantity supplied /change in price X P/Q**

** NOTE: EMILY, LANA, TOVAH AND ZAFIR, AND CHRISSA that the price and quantity implied here is
the original price and quantity before the change in price is imposed.

The P.E.S is in effect calculating the co-efficient or simply the gradient of the Supply Curve: let us
consider the following example:

TABLE1: SUPPLY SCHEDULE FOR CHARLES CHOCOLATES CHOO CHOOS:

PRICE OF CHARLES CHOCOLATES CHOO CHOOS QUANTITY OF CHARLES CHOCOLATES CHOO

 CHOOS SUPPLIED PACKS

$40 100

$60 250

As such the change in price is $40-$60=$20

The change in quantity supplied is 250-100=150

**note that the original price was set at $40.

Therefore, the P.E.S is as such:

150/20 X 40/100 or when simplified

3/1 X 2/2= 3

Therefore from the calculation we have found that the P.E.S=3

The answer from the above example shows us that the P.E.S. for Choo choo’s is greater than 1 not
less than infinity.

Therefore:

P.E.S.>1 BUT ALSO P.E.S<INFINITY OR JUST

1<P.E. S< INFINITY.

The result of the above calculation gives us what is known as the PES coefficient

As such there are 5 categories of P.E.S just based upon the results on finding the co-efficient:

They are:

(1) ELASTIC SUPPLY:

When a good has elastic supply it implies that any change in the price of the good itself will
lead to more than proportionate changes in the quantity supplied of the good itself:

Let us consider the following diagram which contains graphs and examples for both elastic
and inelastic supply curves:

DIAGRAM 1: GRAPHS CONTAINING BOTH ELASTIC AND INELASTIC SUPPLY CURVE

REPRESENTATIONS:
 Let us calculate the P.E.S from the graph to the right of the above diagram first:

We will assume that the original price before the price change was $80 and the qty. supplied
at that price was 60 units however price went up to $106 and the qty. supplied changed to
100 units.

Therefore change in price= $106-$80=26

And the change in qty supplied=100-60 = 40

To calculate p.e.s

P.E. S=change in quantity supplied /change in price X P/Q**

40/26 X 80/60= 2/13x 40/3= 80/39= 2.05

P.E. S=2.05

As we can see by the above diagram and example price increases by 3% only whereas the
quantity supplied increased by 66.67%. we have therefore seen a much more than
proportionate change in the quantity supplied in relation to the change in its price, therefore
the P.E.S is said to be Elastic, as the co-efficient found is greater than 1 but less than infinity.

Therefore:

P.E.S.>1 BUT ALSO P.E.S<INFINITY OR JUST

1<P.E. S< INFINITY.

** note that the above example of CHOO CHOOS also demonstrate having Elastic Supply.

***** it should also be noted that all elastic supply curves cut or intersect with the vertical
axis Price.
 (2) Inelastic Supply: LET US CONSIDER THE FOLLOWING EXAMPLE:

TABLE2: SUPPLY SCHEDULE FOR CHARLES CHOCOLATES PING PONG:

PRICE OF CHARLES CHOCOLATES PING PONG QUANTITY OF CHARLES CHOCOLATES PING

PONG SUPPLIED PACKS

$40 210

$60 280

**note that the original price was set at $40.

As such the change in price is $40-$60=$20

The change in quantity supplied is 210-280=70

**note that the original price was set at $40.

Therefore, the P.E.S is as such:

70/20 X 40/210 or when simplified

1/1 X 2/3= 0.67.

From the above example we have found that the P.E.S for Ping Pong is 0.67
Therefore, we see that the P.E.S. IS GREATER THAN 0 BUT LESS THAN 1, THEREFORE

PES>0 BUT ALSO PES<1 OR

0<PES>1 or simply put when P.E.S falls in between o and 1 it is said to be inelastic.

Let us now reconsider the diagram given above depicting both elastic and inelastic supply:
 Let us calculate the P.E.S from the info given in the 1 st graph:

We will assume that the original price before the price change was $80 and the qty. supplied
at that price was 60 units however price went up to $106 and the qty. supplied changed to
64 units.

Therefore change in price= $106-$80=26

And the change in qty supplied=64-60 = 4

To calculate p.e.s

P.E. S =change in quantity supplied /change in price X P/Q**

4/26 X 80/60= 2/13 X 4/3= 8/39= 0.307

P.E. S=O.307

Thus we have concluded from the above graphical example that the P.E.S is greater than 0
but less than 1, hence: P.E.S>0 AND P.E.S<1, ERGO:
0>PES>1 THUS P.E.S IS INELASTIC

Upon closer inspection of the graph it can be inferred that in general ALL inelastic supply
curves will cut the horizontal or Quantity axis

(3) UNITARY ELASTIC SUPPLY:

This means that a change in price will bring about an equal or proportionate change in
quantity supplied, so if price rises by 50%, this implies that for goods with a Unitary P.E.S,
the supply should also rise by the same 50%, in this case the P.E.S co-efficient is equal to 1 or
unity let us consider the following example:

TABLE 3: SUPPLY SCHEDULE FOR CHARLES CHOCOLATES CHEERS:

PRICE OF CHARLES CHOCOLATES CHEERS QUANTITY OF CHARLES CHOCOLATES CHEERS

SUPPLIED PACKS

$40 200

$60 300
**note that the original price was set at $40.

As such the change in price is $40-$60=$20

The change in quantity supplied is 200-300=100

**note that the original price was set at $40.

Therefore, the P.E.S is as such:

100/20 X 40/200 or when simplified

1/1 X 2/2= 1x1= 1

Therefore the P.E.S.=1 OR UNITARY P.E.S.

DIAGRAM 2: UNITARY ELASTIC SUPPLY:

***It should be noted that if any supply curve passes through the origin, then supply is
unitary

(4) TOTALLY INELASTIC SUPPLY:

When supply does not respond at all to any changes in its price it is said to be perfectly
inelastic supply, this implies that there can be infinitesimal changes in the price of a product
and there will be 0 to very little change in quantity supplied:
This can be shown via the diagram below:
 DIAGRAM 3: TOTALLY INELASTIC SUPPLY:

*** in this case the P.E. S=0

(5) PERFECTLY ELASTIC SUPPLY:

DIAGRAM 4: PERFECTLY ELASTIC SUPPLY:

 ***THIS DIAGRAM IMPLIES THAT THE QUANTITY SUPPLIED IS HIGHLY RESPONSIVE TO
CHANGES IN PRICE AS EVEN A MINISCULE CHANGE IN ITS PRICE WILL HAVE EXTREME
CHANGES IN THE QUANTITY SUPPLIED, THE BEST EXAMPLE WE HAVE OF THIS TYPE OF
SUPPLY CURVE IS THE LABOUR SUPPLY CURVE IN THE ECONOMY, AS IT IS REPRESENTED BY A
HORIZONTAL SUPPLY CURVE
 IF WAGES FALL EVEN A LITTLE, NO LABOUR WILL BE SUPPLIED WITHIN THE ECONOMY,
AS IS WHAT WAS THE CASE IN THE 1980’S SIERRA LEONE.
 P.E.S IS EQUAL TO INFINITY

FACTORS AFFECTING P.E.S:

(1) TIME: P.E.S tends to increase over time, in a short time period if the price of the
good/service that the firm produces increases, the firm would be unable to increase
production because of being unable to source the extra raw materials and labour required to
undertake such an activity of increasing output dramatically, however over a period of time,
arrangements could be made for such and as a result output can increase,
Therefore, over time the greater the good’s P.E.S. will become.
(2) GESTATION PERIOD: some products such as wine and varieties of cheese, there is a special
gestation or maturity time before these goods can be offered for sale. This implies that even
if the price of the good increases the quantity supplied cannot and will not be increased.
Goods which typically have little to no gestation periods tend to be much more elastic than
products or goods which do