Price Elasticity of Supply (PES)

Moving on to the final elasticity, we will look at the responsiveness of supply to changes in price – how much producers will change output in response to a price change.

What is PES?

As the name suggests, PES measures the responsiveness of supply to a change in price. All economic agents have one main factor which they aim to maximise – for firms, this is profit. If they retain the same unit cost of production for a higher price, they gain more profit, and so have a greater incentive to supply. Hence, the supply curve is upwards sloping. PES measures the gradient of this slope, and as it is upward sloping, PES is almost always positive.

PES is calculated by dividing the percentage change in price from the percentage change in supply, as seen in the following:

Interpreting PES Values

When PES = 0, supply is perfectly inelastic – supply is constant regardless of the price of the good. Although unlikely, this could include goods for which you can’t scale up production, such as finite resources.

When 0<PES<1, supply is inelastic – when the price increases, supply increases less than proportionately. This could be for goods where although production can be increased, it is not by very much or it takes a long time. This is the case for many hand-crafted luxury goods like watches and jewellery.

A PES value of 1 means supply is unitary elastic. Essentially, supply is directly proportional to price by a factor of 1. A 1% increase in price causes a 1% increase in supply.

For PES>1, supply is elastic. When the price increases, supply increases more than proportionately. For example, goods for which production can be scaled up very quickly – e.g. cheap toys, stationery, books, etc. It also applies when there is a lot of spare capacity.

When PES is infinite, supply is perfectly elastic. Although it is highly unlikely, it means that supply is infinitely responsive at one specific price, and 0 at other prices.