Speed Of Response

How Firms React

1. High PES
   1. Firms can lift output quickly when price rises, so the market clears with only a small price change.
2. Low PES
   1. Firms cannot expand fast, so a rise in demand mainly forces price up and any shortage persists.
3. Over time
   1. As PES rises in the long run, output can expand further, so the market adjusts more fully to the new conditions.

Wider Implications

1. It explains why some markets absorb demand shocks smoothly while others see sharp price swings.
2. Firms with high PES can capture a rise in demand fastest and win extra sales before rivals react.
3. It guides governments in judging whether supply will actually respond to a policy or simply raise prices.

Raising Responsiveness

1. Firms can raise PES by holding spare capacity or stocks, but both tie up resources and add cost.
2. In the short run PES is largely fixed by the nature of production, so quick expansion may be impossible.
3. Over the long run investment in new capacity can make supply far more responsive.

Is a high PES always an advantage?

1. It clearly helps when demand is rising, because a firm that can lift output fast turns the extra demand into extra sales and revenue while price stays near, say, £50, whereas a rival with rigid supply loses those sales; across the market a high PES also keeps prices stable, which helps households budget and lets a government judge that a policy will raise output rather than just prices.
2. But responsiveness is not free, because spare capacity and stocks tie up resources that earn nothing while demand is flat, so a firm facing steady demand pays for flexibility it rarely uses.
3. A high PES can also expose a firm in a downturn, because the idle capacity that let it expand now sits unused as a fixed cost, and in the short run much of PES is set by the nature of production, so the choice is often not even open.
4. On balance, whether a firm should pursue a higher PES depends on the time horizon and on how variable and predictable its demand is: where demand swings sharply and often, carrying spare capacity is usually justified by the sales it captures, whereas where demand is stable or the asset is long-lived, it is better to let PES rise naturally over the long run than to pay to force it up now.