Price Elasticity of Supply
Definition
Price elasticity of supply (PES): the responsiveness of the quantity supplied of a good to a change in its own price, measured as the ratio of the % change in quantity supplied to the % change in price.
PES=% ΔQs% ΔP \text{PES} = \dfrac{\%\,\Delta Q_s}{\%\,\Delta P} PES=%ΔP%ΔQsWhat It Measures
- It sets the % change in quantity supplied against the % change in price, so a larger answer means output reacts more strongly to the same price signal.
- Because both terms are percentages, the coefficient is unit-free, so the flexibility of a £2 kg of tomatoes and a £30,000 car can be compared on the same scale even though their prices differ hugely.
- It refers only to quantity supplied, the amount firms are willing and able to offer, so it captures how producers react, not how consumers react.
Key Idea
- PES tells you how easily and quickly firms can expand or contract output when the price they receive changes.
- A high value signals flexible, responsive supply; a low value signals rigid supply that cannot adjust much.
Why PES Is Positive
- A higher price raises the reward per unit, so producing extra units becomes profitable and firms bring more to market.
- A lower price cuts that reward, so the least profitable units are no longer worth producing and firms withdraw output.
- Price and quantity supplied therefore move in the same direction, so dividing one % change by the other gives a positive coefficient (a rare exception is a backward-bending curve, not required here).
Example
- The farm-gate price of tomatoes rises from £2.00 to £2.20 per kg, a +10% rise in price, and growers pick and pack more crates so quantity supplied rises by +5%.
- Both percentage changes are positive, so the coefficient is positive (+0.5), confirming PES is greater than zero.
A Range, Not One Number
- The value of PES depends on the time period and on conditions such as spare capacity and stocks, so it is not a single constant.
- Agriculture shows this vividly: if the wheat price jumps mid-season, farmers cannot grow more until the next harvest, so supply is near-inelastic now but far more elastic a year later once they can plant extra fields.
- A PES figure is therefore only meaningful when the time period and supply conditions it describes are stated.
Exam technique
- Define PES precisely as the responsiveness of quantity supplied to a change in the good's own price.
- State that PES is normally positive because the supply curve slopes upward.
- Always link the value to a time period, since supply grows more elastic as the horizon lengthens.
Common Mistake
- Do not confuse PES with price elasticity of demand; PES measures quantity supplied, not quantity demanded.
- Do not treat PES as one fixed number for a market, as it changes with the time period.
Self review
- Define price elasticity of supply.
- Which two percentage changes does PES compare?
- Why is PES normally positive?
- Why is PES not a single fixed value for a market?
