Price elasticity of supply (PES)

%DQS/%DP

Price elasticity of supply (PES) - the responsiveness of quantity supplied of a good to changes in that good’s price.

PES is always positive, because there is a direct relationship between quantity supplied and price.

When PES is between 0 and 1, supply is inelastic.

When PES > 1, supply is elastic.

When PES = 1, supply is at unit elastic. A change in price leads to a proportional change in supply.

Inelastic goods are highly volatile in terms of price, because the price needs to change quite a bit before equilibrium is reached, as these changes in price don’t change the amount supplied much.

Elastic goods are less volatile, as there are less likely to be large changes in price as adjustments can be made with smaller changes in price changing quantity a lot.

Factors that determine PES:

1 Spare production capacity

This is how close to full capacity a firm is. More capacity means a firm Is more elastic.

2 Stocks of finished goods

If there are stocked goods (e.g. iPhones stored in a warehouse), supply is more elastic, as following a rise in price, more goods can instantly be supplied.

3 Factor substitution/mobility

What else you can do with the factors of production

If you can do a lot with them, more elastic, as when price shifts, you can easily get resources to increase supply.

If you are more specialised, more inelastic.

4 Production speed/complexity

Slower production = more inelastic

Time lag in production (e.g. agriculture) = more inelastic.

5 Time horizon

The longer time period for something to be produced, the more inelastic, as there is a lag between the price change and the change in supply.

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