Price Elasticity of Supply
Price elasticity of supply measures the relationship between change in quantity supplied and
a change in price.
• If supply is elastic, producers can increase output without a rise in cost or a time
delay
• If supply is inelastic, firms find it hard to change production in a given time period.
The formula for price elasticity of supply is:
Percentage change in quantity supplied divided by the percentage change in price
1. When Pes > 1, then supply is price elastic
2. When Pes < 1, then supply is price inelastic
3. When Pes = 0, supply is perfectly inelastic
4. When Pes = infinity, supply is perfectly elastic following a change in demand
What factors affect the elasticity of supply?
(1) Spare production capacity
If there is plenty of spare capacity then a business should be able to increase 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 finished products and components
If stocks of raw materials and finished products are at a high level then a firm 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 in the market.
(3) The ease and cost of factor substitution
If both capital and labour resources are occupationally mobile then the elasticity of supply
for a product is higher than if capital and labour cannot easily be switched. A good example
might be a printing press which can switch easily between printing magazines and greetings
cards.
(4) Time period involved in the production process
Supply is more price elastic the longer the time period that a firm is allowed to adjust its
production levels. In some agricultural markets the momentary supply is fixed and is
determined mainly by planting decisions made months before, and also climatic conditions,
which affect the production yield.
