Price Elasticity of Supply (PES) measures the responsiveness of the quantity supplied of a good or service to a change in its price. It is represented by the following formula:
A high PES indicates that supply is highly responsive to price changes, whereas a low PES indicates that supply is relatively unresponsive.
Types of Price Elasticity of Supply
Elastic Supply (PES > 1)
When the PES is greater than one, the quantity supplied changes by a greater percentage than the price change. For example, if the price increases by 10% and the quantity supplied increases by 20%, the PES is 2.
Inelastic Supply (PES < 1)
When the PES is less than one, the quantity supplied changes by a smaller percentage than the price change. For example, if the price increases by 10% and the quantity supplied increases by only 5%, the PES is 0.5.
Unitary Elastic Supply (PES = 1)
When the PES is equal to one, the percentage change in quantity supplied is exactly equal to the percentage change in price. For example, if the price increases by 10% and the quantity supplied also increases by 10%, the PES is 1.
Perfectly Elastic Supply (PES = ∞)
In this scenario, any small change in price results in an infinitely large change in quantity supplied. This is a theoretical extreme and is rarely observed in real markets.
Perfectly Inelastic Supply (PES = 0)
In this case, the quantity supplied remains constant regardless of any change in price. This situation often occurs with goods that have a fixed supply, such as land.
Special Considerations
- Time Period: The elasticity of supply can vary over different time frames. In the short term, supply is usually less elastic because producers cannot quickly change output levels. Over the long term, supply tends to be more elastic as firms can adjust their production capacities.
- Factor Mobility: The ease with which factors of production can be moved between uses can affect PES. High factor mobility generally results in a higher PES.
- Availability of Spare Capacity: Firms with unused capacity can increase production more easily when prices rise, leading to a higher PES.
- Production Speed: Industries that can ramp up production quickly tend to have a higher PES.
Examples
Agricultural Products
Agricultural goods often exhibit low elasticity of supply in the short term because production involves long growing periods. For example, if the price of wheat rises, farmers cannot quickly increase the current season’s supply, making the PES relatively low.
Manufactured Goods
In contrast, manufactured goods often have higher elasticity. For instance, if the price of smartphones increases, manufacturers can ramp up production relatively quickly, leading to a higher PES.
Historical Context
The concept of elasticity, including price elasticity of supply, was first developed by British economist Alfred Marshall in the late 19th century. It has since become foundational in economic theory, shaping how economists and policymakers understand and predict the behavior of markets.
Applicability
Understanding PES is crucial for businesses and policymakers. Firms use it to anticipate the effects of price changes on their supply levels, while governments may consider PES when implementing tax policies, price controls, and other regulatory measures.
Comparisons and Related Terms
- Price Elasticity of Demand (PED): Measures the responsiveness of the quantity demanded to changes in price.
- Cross Elasticity of Demand: Measures how the quantity demanded of one good responds to a price change in another good.
- Income Elasticity of Demand: Measures how the quantity demanded changes in response to changes in consumer income.
FAQs
How do you calculate Price Elasticity of Supply?
PES is calculated using the formula:
Why is Price Elasticity of Supply important?
Can PES be negative?
References
- Marshall, A. (1920). Principles of Economics. London: Macmillan.
- Pindyck, R.S., & Rubinfeld, D.L. (2018). Microeconomics. Pearson.
- Nicholson, W., & Snyder, C. (2016). Intermediate Microeconomics and Its Applications. Cengage Learning.
Summary
Price Elasticity of Supply (PES) is a key economic metric that measures how the quantity supplied of a good or service responds to price changes. Factors influencing PES include time period, factor mobility, spare capacity, and production speed. Understanding PES is essential for both firms and policymakers to anticipate market responses and make strategic decisions.
