Price Elasticity of Supply (PES)

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• Measures responsiveness of quantity supplied of a good to a change in its price, ceteris paribus

• When a price change results in a more than proportionate change in quantity supplied, SS is price elastic
• When a price change results in a less than proportionate change in quantity supplied, SS is price inelastic
• When a price change results in a proportionate change in quantity supplied, SS is unit price elastic
• Price elastic: $1<PES<\infty$
• Price inelastic: $0<PES<1$
• Unit Price Elastic:************************* $PES=1$
  • Any straight line starting from the origin is unit price elastic

Factors Affecting PES

1. Time Period
   1. Very short run
   2. Short run
   3. Long run
2. Mobility of Factors of Production
3. Spare capacity of firms
4. Level of stocks and inventories

Time Period

Very Short Run*

• Fixed FOP
• Unable to respond to $P_x$ changes
• Almost perfectly $P_x$ inelastic supply

Short Run

• Able to adjust some variable FOP
• Able to respond to $P_x$ changes by increasing its variable FOP
• $P_x$ inelastic supply

Long Run*

• Able to adjust all FOP
• Able to respond to respond to $P_x$ changes
• $P_x$ elastic supply

If time period is longer, firms are able to adjust output more easily because FOP are variable*

• Therefore, the longer the time period, the more price elastic supply is

Mobility of Factors of Production

• Mobility of FOP: Ease and speed with which firms can shift resources and production between different products or uses
• The greater the ease and speed, the greater responsiveness of quantity to change in price will be
• SS is price elastic*

1. Price increases, due to an increase in demand
2. Producers want to increase quantity supplied
3. Additional FOPs are required
4. Firm is able to substitute one FOP with another easily and within less time

• Determines how much more quantity supplied can be increased

Spare Capacity of Firms

• Spare capacity: Measures whether there are spare factor resources
• If firms have spare capacity:
  • Easy to respond with an increased output to a price rise
  • Supply will be price elastic
  • Given a price increase, firms utilise spare factor resources
  • QS is very responsive to price changes
  • Price elastic supply
• But if the firm’s capacity is fully utilised:
  • More difficult to respond to a price rise
  • SS is price inelastic
  • Given a price increase, firms cannot utilise spare factor resources, as capacity is fully utilised
  • QS is not very responsive to price change
  • Price inelastic supply

Level of Stocks and Inventories

• Firms that have a high level of stocks of output have the ability respond to a price increase by supplying these stocks onto the market at a faster rate
• Supply is price elastic
• Short term factor affecting PES
  • eventually level will run out