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Price Elasticity of
Supply
PES
PES Learning Outcomes:
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Concept of Price Elasticity of Supply
Calculate PES
Explain using diagrams and PES values
Determinants of PES
Explain why the PES for primary
commodities is relatively low and the PES
for manufactured products is relatively
high
Price Elasticity of Supply (PES)
• A measure of how much the
supply of a product changes
when there is a change in the
price of the product
• “How much does the quantity
supplied change when the price
changes?”
Price Elasticity of Supply (PES)
% D Quantity Supplied
% D Price
Percent change in quantity supplied / Percent change in price
PES Example
• A publishing firm realizes that they can
now sell their monthly magazine for $5.50
instead of $5.00. In light of this, they
increase their supply from 200,000 to
230,000 magazines per month. Calculate
the price elasticity of supply.
• PES = 15% / 10% = 1.5
Range of PES Values
• INELASTIC SUPPLY:
– Price elasticity of supply of less than 1 and
greater than zero
• UNIT ELASTIC:
– Price elasticity of supply equal to 1
• ELASTIC:
– Price elasticity of supply greater than 1 and
less than infinity
Range of PES Values
• PERFECTLY INELASTIC:
–Price elasticity of supply is
equal to zero
• PERFECTLY ELASTIC:
–Price elasticity of supply value
of infinity
Supply curves with different price elasticity of supply
P
S1
Any straight-line
supply curve
starting from the xaxis has a PES value
of less than one
P0
O
PES = <1
Q0
Q
Supply curves with different price elasticity of supply
P
PES = >1
S2
P0
O
Any straight-line supply
curve starting from the yaxis has a PES value
greater than one
Q0
Q
Supply curves with different price elasticity of supply
P
PES = 1
S1
S2
Any straight-line
supply curve, passing
through the origin,
has an elasticity of
supply of one
O
Q
Determinants of PES
• The amount of time following a
change in price
• The mobility of factors of production
• The ability to store stocks
• The amount of unused capacity
Determinants of PES
• Time following a change in price
– The shorter the time period the lower the PES
– Market Period: the period immediately
following a change in price (supply would be
highly inelastic)
– Short Run: period of time over which land &
capital are fixed, but labor is variable (supply
would be more elastic than the market period)
– Long Run: period of time over which all
factors of production are variable (supply is
highly elastic)
Determinants of PES
• Mobility of Factors of Production
– The more mobile the factors of
production (land, labor and capital) the
more responsive a firm can be to
changes in price
– Relatively elastic supply: manufactured
goods & low-skilled services
– Relatively inelastic supply: primary
commodities & heavy industrial goods
Determinants of PES
• The ability to store stocks
– If large inventories of a good can easily
be stored in warehouses or kept on
hand by producers, then supply of the
good can be highly responsive to
changes in the price
Determinants of PES
• The amount of unused capacity
– Excess capacity refers to the amount a
firm is able to produce in the short run
without having to expand its plant size
and the amount of capital and land
employed in production
– If an industry is operating at or near full
capacity, supply will be highly inelastic
– If an industry is operating under
capacity, supply will be highly elastic
PES Exercise
Exercise
A firm producing stuffed toys experiences
an increase in the demand for its main
product, a cuddly dog, because of an
increase in its popularity. The price of the
toy rises from $15 to $18. In response, the
firm increases its output of the toy from
5,000 per week to
5,500 per week.
1.Using a demand and supply diagram, explain
why the price of the toy dog has increased.
2.Calculate the elasticity of supply for the
toy dog.
Effect of a shift in the demand curve
P
S
i
18
PES = 10% / 20% = .5
g
15
D2
D1
O
5000
5500
Q