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Explaining Price Elasticity of Supply

Levels: AS, A Level Exam boards: AQA, Edexcel, OCR, IB

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Price elasticity of supply (PES) measures the relationship between change in quantity supplied
following a change in price

Elasticity of Supply

Price elasticity of supply

If supply is elastic (i.e. PES > 1), then producers can increase output without a rise in cost
or a time delay

If supply is inelastic (i.e. PES <1), then rms nd it hard to change production in a given
time period.
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What is the formula for calculating price elasticity of supply?

The formula for price elasticity of supply is:

Percentage change in quantity supplied divided by the percentage change in price

When Pes > 1, then supply is price elastic

When Pes < 1, then supply is price inelastic

When Pes = 0, supply is perfectly inelastic

When Pes = innity, supply is perfectly elastic following a change in demand

An elastic supply curve

Elasticity of supply

What factors aect the elasticity of supply?

1. Spare production capacity: If there is plenty of spare capacity then a business can increase
output without a rise in costs and supply will be elastic in response to a change in demand
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output without a rise in costs and supply will be elastic in response to a change in demand.
The supply of goods and services is most elastic during a recession, when there is plenty of
spare labour and capital resources.

2. Stocks of nished products and components: If stocks of raw materials and nished
products are at a high level then a rm is able to respond to a change in demand - supply
will be elastic. Conversely when stocks are low, dwindling supplies force prices higher
because of scarcity

3. The ease and cost of factor substitution/mobility: If both capital and labour are
occupationally mobile then the elasticity of supply for a product is higher than if capital and
labour cannot easily be switched. E.g. a printing press which can switch easily between
printing magazines and greetings cards. Or falling prices of cocoa encourage farmers to
switch into rubber production

4. Time period and production speed: Supply is more price elastic the longer the time period
that a rm is allowed to adjust its production levels. In some agricultural markets the
momentary supply is xed and is determined mainly by planting decisions made months
before, and also climatic conditions, which aect the production yield. In contrast the supply
of milk is price elastic because of a short time span from cows producing milk and products
reaching the market place.

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Supply elasticity

Summary of key factors aecting price elasticity of supply

Elastic market supply

Here are some topical applications of the concept of price elasticity of supply

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Economics Study notes Elasticity Elasticity of supply Price elasticity of supply

Geo Riley
Geo Riley FRSA has been teaching Economics for nearly thirty years. He has over
twenty years experience as Head of Economics at leading schools. He writes
extensively and is a contributor and presenter on CPD conferences in the UK and
overseas.
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