Price elasticity of supply (PES)

Learning outcome
■ Use the formula for PES to calculate PES, changes in
price and changes in quantity
■ Identify the various degrees and range of values for PES
■ Draw diagrams showing the range of values for PES,
including relatively elastic, inelastic, perfectly inelastic,
perfectly elastic and unitary
■ Analyse the determinants of PES
■ Apply PES to analyse the reasons why primary
commodities generally have a lower PES than
manufactured products
Price Elasticity of Supply
■ Price elasticity of supply (PES) measures the
responsiveness of quantity supplied to
changes in price
■ The PES can be calculated using the formula:

% change in quantity supplied %∆Qs

--------------------------------------------- %∆P
% change in price
Price Elasticity of Supply
■ Calculate and comment on the elasticities below:

■ After a massive surge in consumer demand, the market price for good
A rises to $15.74, up from its original price of $14.99. Firms operating
in the market respond by increasing output from 12,500,000 units per
annum to 13,500,000 per annum

■ Output from producers has gone from 55495 units per month to 57715
units per month. This occurred after favourable coverage in a popular
documentary leading to rising demand for good A. This has pushed up
prices from $25 to $27.

■ Good A is entering its twilight years on the market, consequently

demand is falling after consumers are switching to newer alternatives.
As a result, the price has fallen to $65 from the former price of $69.90.
Firms has altered production accordingly and now have gone from
512697 to 476808 units per annum
Price Elasticity of Supply
Formula: PES = %∆Qs
%∆P
■ Price ↑ by 5%, Qs ↑ by 8%
8/5 = 1.6 elastic
■ Price ↑ by 8%, Qs ↑ by 4%
4/8 = 0.5 inelastic
■ Price ↓ by 7%, Qs ↓ by 7%
-7 / -7 = 1 unitary/unit
Price Elasticity of Supply

■ As the supply curve is upward-sloping the

PES will always be positive as:

■ If P↑ then Qs↑
■ If P↓ then Qs↓
Price Elasticity of Supply
To summarise:
■ PES = 0 perfectly inelastic
■ PES < 1 inelastic
■ PES = 1 unitary
■ PES > 1 elastic
■ PES = ∞ perfectly elastic

■ These can be represented graphically as

demonstrated in the following slides
 Perfectly inelastic supply
P
S
PES = 0

O Q1 Q
 Inelastic supply

P
PES < 1
S

O Q
 Unitary

P
S

PES = 1

O Q
 Elastic supply

P S

PES > 1

O Q
 Perfectly elastic supply
P PES = ∞

O Q
Influences on Price Elasticity

■ What are the potential determinants of price

elasticity of supply?
Influences on Price Elasticity
Mobility/flexibility of factors of production
■ This refers to how easily a producer can change the type of

goods they produce (when the same resources can be used

to produce more than one type of good, it is called a
substitute in production)

■ Producers will alter production to follow changes in prices

■ If producers can easily alter production and produce an

alternative the PES is high

■ If producers cannot easily alter production the PES is low

Influences on Price Elasticity

Mobility/flexibility of resources

■ E.g. 1 a shop selling clothes can quickly change to a bag

shop as the resources are suitable for both

■ E.g. 2 a car factory has specialised machinery. Perhaps

they can alter the model of car produced quickly, but they
are unable to change to another type of good.
Influences on Price Elasticity
Rate at which costs increase/Availability of resources

■ If the marginal cost of producing a product increases rapidly,

producers can be disincentivised from increasing production (vice
versa)

■ The more readily available resources are to firms the more elastic
supply will be as they can easily acquire more resources at low
cost and increase output in response to a price rise

■ Potential examples could include raw materials i.e. copper is more

readily available than gold. It is easier to find unskilled workers
than it is those for roles that require long, expensive training
periods and vast knowledge and experience
Influences on Price Elasticity
Time
■ The shorter the period of time the more difficult it is to switch

production from one area to another. Therefore the shorter

the time period the more inelastic the PES. There are several
factors connected to time:

■ Market period – all factors of production are fixed

■ Short run – at least one factor of production is fixed

■ Long run – all factors of production are variable

Influences on Price Elasticity
Time continued…
■ Ability to keep stock – durable vs non-durable goods –

durable goods can be kept a long time (more elastic)

■ Ease of entry/exit – some markets are easy to enter/exit

allowing firms to react quickly to price changes (more
elastic)

■ Spare capacity – some firms may have resources (such as

machinery) they are not using. These resources may be
better utilised allowing output to change – in such a case
supply is more elastic
Primary and secondary production
■ Primary industries include farming, forestry, fisheries,
mining and other natural resource extraction
■ Secondary industries involve manufacturing and
processes to turn raw materials and unfinished goods
into finished goods and components
■ Primary industries tend to be relatively inelastic due
to the time constraints and sunk costs involved in the
production process
■ The result is that prices, thus income in primary
industries tend to be more unstable
1. Calculate and evaluate the PES for the following goods:

The price of bottled water increases from 1RMB to 1.2RMB

causing the quantity supplied to increase from 200,000 per
week to 250,000 per week.

The local supply of chicken to the market has increased from 30,000
per week to 31,230 as a result of the price increasing from 30RMB to
35RMB.

2. In the short-term the PES of agricultural products tends to be

inelastic. However in the long-term it is elastic. With the use of
examples explain why this is.

3. Explain why hi-tech products that require significant levels of

investment to produce would tend to have a lower PES than simple
manufactured products.
The price of bottled water increases from 1RMB to 1.2RMB
causing the quantity supplied to increase from 200,000 per
week to 250,000 per week.

■ 25%/20% = 1.25

■ The supply is elastic – Possibly because bottled water is simple and

easy to manufacture. Suppliers can adjust production quickly. It can
also be stored for long periods of time.
The local supply of chicken to the market has increased from 30,000
per week to 31,230 as a result of the price increasing from 30RMB to
35RMB.

■ 4.1%/16.7% = 0.25

■ The supply is inelastic – Possibly because chickens take time to

grow, so it takes time to adjust production levels and meat is,
generally speaking, a non-durable good (it is difficult and expensive
to store meat safely)
In the short-term the PES of agricultural products tends to be
inelastic. However in the long-term it is elastic. With the use of
examples explain why this is.
■ Using the example of wheat.

■ Takes a long time to grow (a few months from planting to harvest) so if farmers
want to produce more wheat, they will plant more seeds, but it will take several
months for this extra production to be sold on the market.

■ Food is often difficult to store for long periods of time, so there isn’t ‘extra stock’
that can be released onto the market when producers want to increase supply.

■ Little spare capacity – most of the land that is suitable for agriculture is already
being used. Increasing production of wheat means reducing production of other
foods. Farmers may be reluctant to make this decision in the short-term (it carries
a risk that prices of wheat may fall again before the farmer harvests the wheat)
Explain why hi-tech products that require significant levels of investment to
produce would tend to have a lower PES than simple manufactured products.

■ Barriers to entry/exit – if it takes a lot of money to set up a company and

start producing goods, (e.g. a car manufacturer needs expensive
complex machines to produce cars) then supply is often slow to adjust
to price changes as new firms don’t enter the market.

■ Other markets, e.g. the market for clothes, would be much more elastic
as it is relatively simple and cheap to start a company that manufactures
clothes. As price increases, new firms will enter the market quickly and
supply increases. As prices fall, firms can easily switch production to
something else and exit the market, hence supply will quickly fall.

■ Other barriers are expertise (needing special workers that need to be

trained to operate complex machines) and patents (legal barriers that
stop firms from copying each other’s ideas)
S1
200%/25% = 8
= elastic supply
S2
9%/25% = 0.36
=inelastic supply