Price Elasticity

Of Supply
By Paarssh Mehta
 What is PES?
Price elasticity of supply is a measure of the
responsiveness of quantity supplied of a product or
service is to a change in its price,in a given time
period ceteris paribus.

It talks about how sensitive the quantity supplied of

a good or service is to changes in its price. It helps us
understand how producers respond to price changes
in the market.

The formula to calculate PES :

%change in Qs/%change in price

PES value is always positive due to the law of

supply which states that there is a positive
relationship between the price and Qs of a good or
service
Degrees of Elasticity in PES
1)Perfectly Inelastic Supply(PES=0):
In this case, the quantity supplied remains
constant, regardless of any change in
price.Eg.Number of seats in a stadium or
theatre
2)Inelastic Supply(0<PES<1):
A percentage change in price results in a
proportionally smaller percentage change
in quantity supplied.Eg.Primary
commodities like crude oil and coal.
3)Unitary Elastic(PES=1): 4)Elastic supply(1<PES<♾):

A percentage change in price results in an A percentage change in price results in a

equal percentage change in quantity proportionally larger percentage change in
supplied.(Unrealistic) quantity supplied.Eg.Manufactured goods
5)Perfectly Elastic Supply(PES=♾)

the slightest change in price will lead to

an infinite change in the quantity
supplied.(Unrealistic)
Determinants of PES,what affects PES?
1. Availability of stock of finished goods and components: Firms with more stock can
increase the supply of their products and store them in reserves ,this in case the
demand for the product increases unexpectedly.
2. Degree of spare production capacity: Firms can increase output of their goods or
services reletavely quickly if they have spare or unused equipment or machinery.
3. Time period required to adjust the scale of production: The supply of a good will be
less elastic the longer the time the producers will take to increase the production of
the good,a quicker increase in supply causes a easier increase in price.
4. Mobility and availability of FOPs: In the end firms will be able to expand production
and supply in response to consumer demand and prices will depend on availability of
resources.The more mobile the resources are the easier it will be to reallocate those
resources.
 Application of PES:

5. Manufacturing and Production:

• Manufacturers use PES to understand how quickly they can increase or decrease production in response to.
changes in demand. This knowledge is essential for inventory management and production planning.

6. Government Taxation and Subsidy Policies:

• Governments use PES to assess the impact of tax policies on different industries. Industries with inelastic supply
may bear a higher tax burden, while those with elastic supply may pass on the tax to consumers or adjust production.

7. Transportation:

• PES can help transportation companies, such as airlines or shipping firms, assess their ability to respond to
changes in fuel prices, which can impact costs and ticket prices.

8. Retail Pricing and Inventory Management:

• Retailers use PES to determine how much inventory to stock and how to set prices. For products with inelastic
supply, they may need to be more cautious about stock levels and pricing
Why is PES
important?

PES is vital for businesses to make pricing

and production decisions. A good
understanding of PES helps companies
adjust production levels to meet changing
market conditions efficiently.So it is
important for consumers to know how
effectively suppliers can respond to
changes in the market conditions.
Thank you!