Price Elasticity of Supply (PES)
Price elasticity of supply is the responsiveness of supply to a change in price.
- If supply is inelastic, increasing supply will take a long period of time and will usually be costly for firms. Therefore, for goods with inelastic supply PES < 1.
- If supply is elastic, firms can increase supply in a short period of time, usually at a low cost. Therefore, the PES for these goods is > 1.
- Supply is perfectly inelastic when PES=0. Any changes in demand can never be met by changes in supply by firms. This would be represented by a vertical supply line.
- Supply is perfectly elastic when PES = infinity. Any quantity demanded can be met by changes in supply by firms. This would be represented by a horizontal supply line.
Factors Influencing PES:
- Level of stocks – if goods can be stored, then firms can keep a level of stock and therefore increase the market supply whenever needed.
- Perishability of stock – If goods are perishable, such as fresh fruit, then supply is more inelastic as you can’t store large quantities in case of an increase in demand.
- Levels of spare capacity – if a firm is operating in full capacity, then supply will be more inelastic because there is no room to produce more. But if there are spare resources then supply will be more elastic as firms can increase and decrease production of the product if necessary.
- Time scale – in the short run supply is more inelastic because producers cannot increase supply quickly. However, in the long run supply tends towards being more elastic as any fixed factors of production in the short run can be variable in the long run.
- Barriers to entry into a market – if there are many barriers to enter a market, then there will be less producers who can respond to an increase in demand. Thus, supply will be more inelastic.
- How substitutable factors are – if capital and labour are mobile then supply is more price elastic as resources can be transferred or allocated to where extra supply is needed.