1.2.2.6 Price elasticity of supply

Price elasticity of supply (PES) is a measure of the responsiveness of the quantity supplied of a good or service to changes in its price. It indicates how much the quantity supplied changes in response to a change in price. The concept of price elasticity of supply is crucial for understanding how producers react to price changes and how the quantity supplied in the market is affected by those price fluctuations.

The formula for calculating the price elasticity of supply (PES) is:

PES = (% Change in Quantity Supplied) / (% Change in Price)

Where:

• % Change in Quantity Supplied is the percentage change in the quantity supplied of the good or service.
• % Change in Price is the percentage change in the price of the good or service.

The value of PES can be classified into three categories:

1. Elastic Supply (PES > 1): If the absolute value of PES is greater than 1, the supply is considered elastic. This means that the quantity supplied is highly responsive to changes in price. A relatively small change in price leads to a proportionally larger change in the quantity supplied. Producers are flexible in adjusting their production levels to take advantage of price changes.
2. Inelastic Supply (0 < PES < 1): If the absolute value of PES is less than 1, the supply is considered inelastic. This indicates that the quantity supplied is less responsive to changes in price. Producers have limited flexibility in adjusting their production levels in response to price changes. A change in price leads to a proportionally smaller change in the quantity supplied.
3. Unitary Elastic Supply (PES = 1): If the absolute value of PES is exactly 1, the supply is considered unitary elastic. This means that the percentage change in the quantity supplied is equal to the percentage change in price. Producers can adjust their production levels in a way that the change in price and the change in quantity supplied result in constant total revenue.

Factors Affecting Price Elasticity of Supply: The price elasticity of supply is influenced by several factors, including:

• Time Horizon: In the short run, production levels may be fixed, leading to inelastic supply. In the long run, producers have more time to adjust production capacity, leading to more elastic supply.
• Availability of Inputs: If inputs required for production are readily available, producers can respond quickly to price changes, resulting in more elastic supply.
• Production Flexibility: Producers with greater flexibility in their production processes are more likely to have elastic supply.
• Storage Capacity: Goods that can be easily stored and held in inventory are more likely to have elastic supply, as producers can adjust the quantity supplied over time.