0455 · 2.7Price elasticity of supply pes

Measuring price elasticity of supply

0:00A café can make extra sandwiches when their price rises, especially if ingredients and staff are available. A farmer cannot produce extra wheat overnight. Both producers have a reason to supply more, but their ability to respond differs. In this video, we will measure that response, interpret supply diagrams, and explain what makes supply elastic or inelastic. Quantity supplied is the amount producers are willing and able to sell at a given price over a particular period.

0:26A higher price usually encourages a larger quantity because additional production becomes more profitable. On an existing supply curve, this movement is an extension of supply. When other influences stay the same, a lower price causes a contraction. Price elasticity of supply measures the responsiveness of quantity supplied to a change in price. We will shorten its name to P E S. The important idea is responsiveness, rather than the amount produced.

0:50A large factory can supply many products but still struggle to expand its output when the market price rises. P E S equals the percentage change in quantity supplied divided by the percentage change in price. The numerator measures the production response, while the denominator measures the price change causing it. Dividing compares their proportional sizes. The result shows whether the quantity response is bigger than, equal to or smaller than the price change.

1:15Percentages make the comparison meaningful across different products and starting quantities. An extra hundred sandwiches could be a large response for a café but tiny for a national producer. The percentage change accounts for that starting size.

Calculating and interpreting PES

1:28To calculate it, divide the change by the original value, then multiply by one hundred. For example, a café raises its sandwich price from ten dollars to twelve dollars. Its quantity supplied rises from two hundred to two hundred and sixty sandwiches per day. Assume other influences remain unchanged. Both changes must become percentages first, because dividing sandwiches by dollars does not measure responsiveness. Twelve dollars minus ten dollars gives a price rise of two dollars.

1:55Dividing two dollars by the original ten dollars and multiplying by one hundred gives twenty per cent. Quantity supplied goes up by sixty sandwiches per day, which is two hundred and sixty minus two hundred. Sixty divided by the original two hundred, multiplied by one hundred, gives thirty per cent. Thirty per cent divided by twenty per cent gives a P E S of one point five. There is no unit because we are comparing two percentages.

2:18Quantity supplied changes proportionately more than price, so supply is elastic. Across this change, the percentage quantity response is one point five times the percentage price change. For normal upward sloping supply, P E S is positive because price and quantity supplied move in the same direction. If both fall, dividing one negative percentage change by another gives a positive result. A value greater than one indicates elastic supply. Between zero and one, supply is inelastic because quantity changes proportionately less than price.

2:48A value of exactly one represents unitary elasticity, where the two percentage changes are equal. For example, a ten per cent price rise produces a ten per cent extension in quantity supplied. P E S is zero for perfectly inelastic supply, because quantity does not respond at all. At the other extreme, perfectly elastic supply has an infinite value. The value matters when demand changes. Suppose demand for a product increases.

3:13With elastic supply, producers extend output a lot, so the price rises only a little. Inelastic supply leaves output almost fixed, and the same increase in demand mainly pushes the price up. Producers with elastic supply can therefore gain more sales from a rise in demand.

Supply elasticity diagrams

3:30On every supply diagram, put price on the vertical axis and quantity supplied on the horizontal axis. Perfectly inelastic supply is vertical. Moving up the line from point A at price P one to point B at price P two leaves quantity at Q one. For example, the number of seats available for a particular performance cannot expand once the venue is full. For an inelastic supply sketch, draw an upward sloping straight line that meets the quantity axis to the right of the origin.

3:56From point A to point B, quantity changes proportionately less than price. The response is limited, but it is not absent. This distinction separates inelastic supply from the perfectly inelastic vertical case. Any straight supply line through the origin has unitary elasticity, however steep or shallow it looks. Along this line, price and quantity supplied remain in a constant proportion. Doubling price therefore doubles quantity, so both rise by one hundred per cent.

4:23The percentage changes match, giving a P E S of one. An elastic straight supply line meets the price axis above the origin. Between points A and B, the percentage quantity response exceeds the percentage price change. So the place where a straight line meets an axis tells you its elasticity. Steepness alone is unreliable because elasticity compares percentages, while gradient compares changes measured in the axis units. Perfectly elastic supply is horizontal, showing different quantities available at the same price.

4:52In this idealised model, producers will supply any quantity at that price, but none below it. Its P E S is described as infinite, so no ordinary calculation gives its value. It is a limiting case, not a claim that real resources are unlimited.

Factors affecting supply elasticity

5:06The main influences on whether supply is elastic or inelastic concern producers’ ability to adjust. The time period is especially important. In the momentary period, output cannot change at all, so supply is perfectly inelastic unless stocks can be released. Over longer periods, producers have more opportunities to alter their resources and production methods. In the short run, some resources remain fixed, such as the size of a factory. Firms can still respond by working extra shifts or using idle equipment.

5:33The long run allows changes to all production resources, including constructing larger premises. Supply therefore usually becomes more elastic as the adjustment period lengthens. Spare capacity means unused production resources that could help increase output. A café with an idle oven can produce extra sandwiches without buying another machine. If every oven is already operating fully, expansion is harder. Greater spare capacity generally makes supply more elastic because additional production can begin quickly.

6:01Stocks are goods already produced and held for future sale. A seller with stored bicycles can release more onto the market when their price rises. Ease of storage matters because durable products can be kept without quickly deteriorating. Fresh fish is harder to store, so sellers have less flexibility unless suitable refrigeration is available. Availability and mobility of factors of production also affect responsiveness. Mobility means how easily resources can move between locations or uses.

6:26A firm can expand faster when suitable workers, equipment and materials are readily obtainable. Shortages of skilled labour or specialised machinery restrict expansion, making supply less elastic. How long production takes creates another important constraint. Wheat needs time to grow, so a higher price cannot produce an immediate extra harvest. Over several growing seasons, farmers can adjust planting and obtain additional equipment. Sustainable forestry also requires long regeneration periods, so extra timber cannot always be supplied rapidly without depleting future resources.

Exam technique and recap

7:01Examiners often see three mistakes on this topic. Elastic supply means a large percentage response, not a large total quantity. A price change causes a movement along the existing supply curve, so never shift the curve for it. In calculations, always work out both percentage changes from the original values before dividing. In examinations, define asks for a precise meaning, while state requires an answer expressed in clear terms. An explain question needs reasons showing why or how the response occurs.

7:30For analyse, examine the relationships in detail, such as how available resources affect production adjustment. A discuss answer develops both sides in a structured way before reaching a justified judgement. Consider the exam-style instruction, explain why wheat supply is likely to be inelastic in the short run. A suitable answer begins with its production constraint. Wheat takes months to grow, so a rise in its price cannot bring an extra harvest straight away.

7:54Quantity supplied therefore changes proportionately less than price, making supply inelastic over that period. A question could also ask you to discuss whether a factory’s supply will become elastic when more time is available. More time allows additional machinery to be installed and workers to be trained. These adjustments increase the factory’s ability to expand output following a price rise. However, scarce materials or unavailable skilled workers can continue to restrict that response.

8:21On balance, supply is usually more elastic over a longer period because producers can adjust more resources. This judgement is strongest when materials and suitable workers remain available. For a calculation question, show both percentage changes, the division, and the interpretation. In a diagram task, label both axes and choose a curve consistent with the required elasticity. P E S compares the percentage response of quantity supplied with the percentage change in price.

8:47Its values distinguish perfectly inelastic, inelastic, unitary, elastic and perfectly elastic supply. The diagrams express those relationships, but steepness alone does not determine elasticity. Producers respond more easily when they have time, spare capacity, stocks and accessible resources.