Price elasticity of supply

Last time

Before we start: last time, in Price elasticity of demand and total revenue, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

How quickly can sellers respond?

When the price of tomatoes doubles in winter, farmers cannot grow more overnight. When the price of plastic buckets rises, a factory can run an extra shift. Sellers react, but some much faster than others. Price elasticity of supply measures how much.

The definition

Price elasticity of supply, or PES, measures the responsiveness of quantity supplied to a change in price. PES equals the percentage change in quantity supplied divided by the percentage change in price. Price and quantity supplied move in the same direction, so PES is a positive number.

Elastic and inelastic supply

If PES is more than 1, supply is elastic: quantity supplied changes by a bigger percentage than price. If PES is less than 1, supply is inelastic: quantity supplied changes by a smaller percentage than price. That is the two-mark definition of inelastic supply. If PES is 0, supply is perfectly inelastic: the quantity cannot change at all, like the seats in a stadium on match day.

Two worked examples

The price of wheat rises by 20 per cent and farmers supply 10 per cent more. PES is 10 divided by 20, which is 0.5. Supply is inelastic. The price of buckets rises by 15 per cent and factories supply 30 per cent more. PES is 30 divided by 15, which is 2. Supply is elastic. As with PED, quantity always goes on top.

What makes supply elastic

Time: the longer firms have, the more they can change output. Supply is more elastic in the long run than in the short run. Spare capacity and stocks: a firm with idle machines, or with goods in a warehouse, can supply more quickly. Mobility of factors: if workers and machines can easily switch from making one product to another, supply is more elastic. And the production period: crops and trees take a long time to grow, so their supply is inelastic.

Why wood is in inelastic supply

One question told candidates that wood is in inelastic supply. The reason is the production period: a tree takes many years to grow. If the price of wood rises, timber firms cannot plant and grow new trees in time, so quantity supplied rises only a little. The same is true of most farm products in the short run, and of things that cannot be made at all, like old paintings or land.

Elastic and inelastic supply curves

A steep supply curve shows inelastic supply: a large change in price brings only a small change in quantity. A flatter supply curve shows elastic supply: a small change in price brings a large change in quantity. When you draw them, label which is which.

Why PES matters

When demand rises and supply is elastic, firms quickly sell much more, and the price rises only a little. When supply is inelastic, the quantity hardly changes, so the price rises a lot. That is why food prices jump after a bad harvest. Firms with elastic supply can take advantage of rising demand, and gain revenue and market share.

Making supply more elastic

Firms can keep spare capacity, so they can raise output quickly, and hold stocks of finished goods. They can train workers to do more than one job, and use new technology that shortens the production period. Governments sometimes store food, such as wheat, so it can be released when a poor harvest pushes prices up.

PED and PES side by side

The two elasticities look alike, but they measure different things. Here they are side by side.

Answering a PES question

For a define question, give the comparison: quantity supplied changes by a smaller, or bigger, percentage than price. For an explain question, name the determinant, then link it: for example, spare capacity means output can rise quickly, so supply is elastic. And for a calculation, show the formula, the numbers in it, and the answer with its meaning.

Mistakes that lose marks

Mistake one: defining inelastic supply as a small change in supply when price changes. It must compare percentages. Mistake two: using the PED determinants, such as substitutes, to explain PES. Mistake three: giving PES a minus sign. Supply rises when price rises. The fix: compare percentages, and use supply factors: time, capacity, stocks.

The full-marks tip

The full-marks tip: define PES by comparing the percentage change in quantity supplied with the percentage change in price. Explain it with supply factors: time, spare capacity, stocks and mobile factors.

On one card

So, on one card: price elasticity of supply. Keep it for revision.