Price Elasticity of Supply

A-level Economics

What it is. How it is calculated. What affects it

Definition: 'Price elasticity of supply (PES) measures the proportional change in quantity supplied due to a proportional change in price'.

PES can be calculated using the following equation:

% change quantity supplied / % change in price

Again, as with other elasticities:

PES above 1: Elastic

PES equal to 1: Unit Elastic

PES between 0 and 1: Inelastic

What are the factors of PES? What makes quantity supplied elastic or inelastic?

Capacity levels: firms physically cannot supply more in this case even if prices rise significantly. If a firm was operating at 25% capacity, then a price increase would be a big incentive but if a firm is at 95% capacity then a similarly sized price increase won't encourage the firm to increase their production massively. Operate near full capacity and PES is inelastic.
Complex production process: if a firm requires skilled labour or very specific capital equipment to complete a job then price increases may mean the firm cannot instantly react and produce more. Simple reason being it is not easy to do that. For example, if you want to provide more brain surgeries then you will need a new team of highly specialised brain surgeons. You're not going tobe able to get hold of them very quickly so even if people are prepared to pay you a lot of money for these surgeries, you still need to get hold of your team. So this is inelastic supply. If the production process is very easy, it is elastic.
Time taken to produce: for example, you can tell a farmer that you want 1 tonne of carrots tomorrow and you'll pay him £1 million for it but if the carrots aren't ready, they're not ready! The farmer won't be able to produce those carrots for you out of thin air because it is seasonal. In this case, it will mean inelastic supply.
Stock Levels - if stock levels are abundant, then firms can react quickly. This will mean PES is elastic. If stock levels are low, then firms can't react to boosts in demand so price will have to rise. This is inelastic supply.
Short-run vs Long-run - in the short term, PES can be more inelastic because you might need extra machinery and other capital equipment to produce more. In the long term, PES might be more elastic because capital equipment can be purchased and installed to cater for extra units needing to be produced.

How does it affect the demand supply diagrams?

Inelastic PES will result in a steeper supply curve. As you can see, prices have to increase drastically to encourage the firm to produce more and more output.

Elastic PES will result in a more shallow supply curve. As you can see, prices only have to rise slightly to incentivise the firm to produce a lot more.

Unit Elastic PES will result in a 45-degree supply curve. This means that prices rise by 10%, output will increase by 10%. Perfectly proportional...