ECONOMICS: PRICE ELASTICITY OF SUPPLY (PES)
Key Terms
Elasticity: The sensitivity of changes in a quantity with respect to changes in another quantity.
Price Elasticity of Demand (PES): An economic metric that measures the responsiveness of a quantity supplied of a good to a change in its price.
Perfectly Inelastic Supply: A situation in which firms/producers can only supply a fixed quantity, hence cannot increase, or decrease the available amount even if there are increases/decreases in price. (Elasticity of supply = 0)
Perfectly Elastic Supply: A situation in which firms are able and willing to supply any quantity of a good or services at the going price, i.e., the supply is infinite.
What is Price Elasticity of Supply (PES)?
Price elasticity of supply is an economic metric that measures the responsiveness of quantity supplied of a good to a change in price. Due to the supply curve being positive the value of the price elasticity of supply is always positive as firms are always willing to increase their supply if there is an increase in price.
How do you Measure Price Elasticity of Supply?
Price elasticity of supply can be measured by dividing the percentage change in quantity demanded by the percentage change in price. This can be done using the following formula:
Price Elasticity of Supply Values
Short/Long- Term Supply (Elasticities)
As was mentioned earlier the value of price elasticity of supply is always positive as firms are always willing to supply more, however the amount that they can supply is limited by duration (short-term or long-term).
For example, a wine maker, may have an increase in demand for his wine however, if he can only produce a certain amount per year and only has a few bottles left in the cellar there is nothing much that he can do to increase supply at that moment in time.
Despite the significant increase in demand which caused price to increase the firm cannot supply that much more. In the short run the only factor firms can influence to produce more is overtime for their workers however keep in mind that this tends to have inflationary pressure on the economy later on if all firms start doing it.
In the long-run it is a different story, firms are able to supply more as they have more time to increase their output. This could be done through improved technology, introduction of capital machinery, improving labour efficiency through training…
As can be seen in the graph above, a small increase in price will result in a massive increase in quantity supplied as firms have the productive capacity to do so.
Extreme Cases of Price Elasticity of Supply
Same as PED, price elasticity of supply can also be seen in extreme cases where supply is perfectly elastic of inelastic.
In the scenario above we can see a perfectly inelastic supply curve, in this case regardless of how much price goes up the same quantity is available. Examples of such scenarios is any case in which something is limited for example seats in a stadium.
In the graph above we can see a perfectly elastic supply curve where producers are willing to supply as much quantity needed at the same price. Such scenarios are not easily spotted in real life.
Why is Price Elasticity of Supply Important?
Price elasticity of supply is important for producers in order for them to know how quickly they can respond to price changes and changes in market conditions.
It is important to note that price elasticity of supply is usually an estimate, and the validity of the data could be debated. Furthermore, price elasticity of supply does not take into account external factors (ceteris paribus).
References/ Further Reading:
Price Elasticity of Supply (PES) – Wikipedia - https://en.wikipedia.org/wiki/Price_elasticity_of_supply