Price Elasticity of Supply
Calculating and Interpreting PES
The Price Elasticity of Supply (PES) is calculated using a specific formula. It compares the percentage change in quantity supplied to the percentage change in price.
The Formula:
The PES formula is written mathematically as: $PES = \frac{\% \Delta Q_s}{\% \Delta P}$. In this formula:
- $\Delta$ (the Greek letter Delta) means "change in."
- $Q_s$ stands for the quantity supplied.
- $P$ stands for the price.
So, the formula reads: "Price Elasticity of Supply equals the percentage change in quantity supplied divided by the percentage change in price."
To calculate a percentage change, you take the new value minus the old value, divide by the old value, and multiply by 100. Because the relationship between price and quantity supplied is usually positive (when price goes up, quantity supplied goes up), the PES value is typically a positive number.
| Elasticity Value (PES) | Term | What It Means | Example |
|---|---|---|---|
| $PES = 0$ | Perfectly Inelastic | Quantity supplied does not change at all when the price changes. | Number of seats in a stadium for a specific game. It's fixed. |
| $0 < PES < 1$ | Relatively Inelastic | Quantity supplied changes by a smaller percentage than the price change. | Farm crops within one season. Hard to quickly plant more if price rises. |
| $PES = 1$ | Unit Elastic | Quantity supplied changes by the exact same percentage as the price change. | A theoretical benchmark. Like a 10% price increase leads to a 10% increase in supply. |
| $PES > 1$ | Relatively Elastic | Quantity supplied changes by a larger percentage than the price change. | Manufactured goods like t-shirts. Factories can ramp up production quickly. |
| $PES = \infty$ (Infinity) | Perfectly Elastic | Producers are willing to supply any amount at a specific price, but nothing at a lower price. | Digital goods like an app sold at a fixed market price. Supply is virtually unlimited. |
What Makes Supply Elastic or Inelastic?
Several key factors determine whether the supply of a product is elastic (responsive) or inelastic (unresponsive). Understanding these helps predict how markets will behave.
1. Time Horizon: This is the most important factor. In the market period (very short run), supply is often perfectly inelastic because goods are already produced and ready for sale. Think of a fish market at the end of the day—the catch is fixed. In the short run, producers can increase output by using existing factories more intensively (e.g., adding extra shifts), making supply somewhat elastic. In the long run, they can build new factories, buy more land, or develop new technology, making supply highly elastic.
2. Availability of Inputs and Spare Capacity: If a factory has unused machines and easy access to raw materials (spare capacity), it can quickly increase supply when prices rise, leading to elastic supply. If resources are scarce or the factory is already running at full capacity, supply will be inelastic.
3. Complexity of Production: Simple goods, like handmade bracelets or lemonade, often have more elastic supply because increasing production is straightforward. Complex goods, like airplanes or advanced computer chips, have inelastic supply in the short run due to intricate manufacturing processes and long lead times.
4. Storage Ability and Perishability: Goods that can be stored cheaply and for a long time (e.g., canned beans, books) have more elastic supply. Producers can build up inventory when prices are low and release it when prices are high. Highly perishable goods (e.g., fresh milk, strawberries) have inelastic supply—they must be sold immediately.
5. Mobility of Factors of Production: If the resources needed for production (labor, capital) can be easily moved from making one product to another, supply is more elastic. For example, a clothing factory that can switch from making shirts to making masks has elastic supply for both products.
From Lemons to Smartphones: PES in Action
Let's apply the concept with two contrasting examples.
Example 1: The Inelastic Supply of Fresh Lemons
Imagine a sudden health trend claims lemon water boosts energy. Demand soars overnight. Can lemon farmers immediately supply millions more lemons? No. Lemon trees take years to grow and bear fruit. In the short run, the quantity of lemons is almost fixed. The supply is highly inelastic. The result? A large increase in demand causes a huge spike in price because the quantity cannot keep up. Over many years, if the high price continues, farmers may plant more trees, making supply more elastic in the long run.
Example 2: The Elastic Supply of Generic T-Shirts
Now, imagine a popular band releases a new logo. Demand for t-shirts with that logo jumps. A clothing manufacturer with modern factories and a steady fabric supply can respond quickly. They can order more blank shirts, run printing machines for extra hours, and maybe even outsource some work. The supply is relatively elastic. The result? The quantity supplied increases substantially with only a moderate increase in price. The market meets the new demand efficiently.
These examples show how PES directly affects price stability and availability in our daily lives.
Important Questions
1. How is Price Elasticity of Supply (PES) different from Price Elasticity of Demand (PED)?
2. Can the elasticity of supply for the same product change?
3. Why is understanding PES important for the economy?
The Price Elasticity of Supply is a powerful tool for understanding the producer's side of the market. It moves beyond the simple law of supply to quantify how much supply will change. By calculating PES and considering factors like time, production complexity, and storage, we can predict market reactions to changes in price. Whether you're running a lemonade stand or analyzing global commodity markets, grasping this concept illuminates why some prices are volatile and others are stable, ultimately revealing the dynamics of production and choice in our economy.
Footnote
[1] Market Outcomes: The final results in a market in terms of price, quantity traded, and allocation of resources, determined by the interaction of supply and demand forces.