⚡ Price Elasticity of Supply (PES)
🍋 PES for beginners: The story of two lemonade stands
Imagine you are 10 years old and you run a tiny lemonade stand. One sunny day, people suddenly want to pay double for a cup. Can you make twice as much lemonade right now? Yes! You still have lemons, sugar, and cups — you just squeeze faster. This means your supply is elastic (PES > 1).
Now imagine a huge theme park that also sells lemonade. They have a contract with a specific farm and their kitchen runs at full power every day. When price doubles, they cannot produce more today because they have no spare fridges, no extra staff, and the farm can't deliver more lemons until next month. Their supply is inelastic (PES < 1).
If the answer is > 1 → elastic (responsive). < 1 → inelastic (stiff).
🏛️ Five pillars: What makes supply stretchy or stiff?
1. Spare capacity 🏭 — A factory that works 8 hours a day can add a night shift (elastic). A factory running 24/7 cannot (inelastic).
2. Storage ability 📦 — Crops like wheat can be stored and sold later (more elastic). Fresh strawberries rot in days (more inelastic).
3. Production time ⏳ — Handmade wooden chairs: you need weeks to train new carpenters (inelastic short run). Mass‑produced plastic chairs: machines can run faster (elastic).
4. Complexity of production 🔧 — Nail salons: hire a trained stylist in days (elastic). Passenger aircraft: years to design and certify (very inelastic).
5. Mobility of factors 🚚 — Workers who can easily switch tasks (e.g., from burgers to salads) → elastic supply. Specialised neurosurgeons → inelastic supply.
| Type of supply | PES value | Everyday example |
|---|---|---|
| Perfectly inelastic | 0 | Seats in a stadium for tonight’s final |
| Inelastic | 0 < PES < 1 | Organic avocados (2‑year trees) |
| Unit elastic | 1 | T‑shirts with just‑in‑time printing |
| Elastic | PES > 1 | Sandwich delivery (more riders = more supply) |
| Perfectly elastic | ∞ | Digital goods (e‑books, apps) |
📊 PES in the boardroom and the government office
👩🍳 Restaurant manager: Friday night price of burgers rises +30%. Kitchen has spare fryers and can prepare +25% burgers. PES = 25/30 = 0.83 (inelastic). She knows she cannot satisfy all extra demand, so she introduces a waiting list. Result: revenue rises, but some customers go elsewhere.
🏛️ City transport planner: To reduce car use, the city raises parking fees by 50%. But the supply of bus rides cannot increase quickly — new buses take 18 months to arrive. PES of bus seats = 0.2 (very inelastic). Solution: the government first gives grants to buy buses, then raises the parking tax.
💻 Video game studio: A game becomes viral; price is fixed, but they sell 500% more copies. Digital supply is nearly perfectly elastic (PES ≈ ∞). They just add more servers. The lesson: information goods stretch infinitely.
❓ Three questions students always ask
Yes — time is the biggest hero. Right after a price rise, farmers cannot harvest more wheat (PES ~ 0.2). After one season they plant more fields (PES ~ 0.7). After three years they buy neighbouring land (PES ~ 1.4). Economists call this the short‑run vs. long‑run supply.
Almost always yes — price and quantity supplied move in the same direction (law of supply). But there are weird exceptions: antique collectors sometimes sell fewer items when price rises because they wait for even higher prices (backward‑bending supply). In school exams, always assume PES ≥ 0.
If price does not change, we do not calculate elasticity — the formula divides by zero. In exercises, you’ll always get positive percentage changes. For perfectly elastic supply, any tiny price change causes infinite quantity change; the number is not a normal fraction.
Price Elasticity of Supply is not just a graph in a textbook. It tells you why concert tickets sell out in seconds (inelastic), why supermarkets never run out of bottled water (elastic, because they store tons), and why a sudden demand for masks in a pandemic causes empty shelves (very inelastic at first, elastic later). The more you understand PES, the better you can predict shortages, price spikes, and even choose a career — industries with elastic supply usually grow faster.
📌 Footnote – terms & abbreviations
[1] PES: Price Elasticity of Supply – the ratio between the percentage change in quantity supplied and the percentage change in price.
[2] Spare capacity: When a firm can produce more without adding new machines or buildings (e.g. empty tables in a restaurant).
[3] Short run / Long run: In economics, short run means at least one factor of production is fixed; long run means all factors can change.
[4] Unit elastic: PES = 1; quantity supplied changes by exactly the same percentage as price.
[5] Backward‑bending supply: A rare situation where higher price leads to lower quantity supplied (mainly labour markets or collectibles).