PES measures how strongly quantity supplied responds to a change in price.
Price elasticity of supply (PES) measures how responsive quantity supplied is to a change in the good's own price.
PES = percentage change in quantity supplied / percentage change in price. PES is positive, because price and quantity supplied move in the same direction.
A PES between 0 and 1 means supply is inelastic. A value greater than 1 means supply is elastic. Exactly 1 is unitary. 0 is perfectly inelastic: quantity supplied cannot change. Perfectly elastic supply is infinite.
On a diagram, elastic supply is flat and inelastic supply is steep. Perfectly inelastic supply is vertical, for example when a firm cannot get more raw materials. Perfectly elastic supply is horizontal.
- PES
- Responsiveness of quantity supplied to a change in price.
- Formula
- PES = % change in quantity supplied / % change in price.
- Values
- 0-1 inelastic, >1 elastic, 1 unitary, 0 perfectly inelastic.
Worked example: Calculating PES
Suppose the price of strawberries rises from $5 to $6 a punnet, and farms supply 1,100 punnets a week instead of 1,000.
- Percentage change in price = 1 / 5 x 100 = 20%.
- Percentage change in quantity supplied = 100 / 1,000 x 100 = 10%.
- PES = 10% / 20% = 0.5.
- Interpret: less than 1, so supply is inelastic. Strawberries take time to grow.
Watch out for this
PES is negative, just like PED.
PES is positive. A higher price gives firms a reason to supply more, so price and quantity supplied move in the same direction.
Check your understanding
A firm cannot get more raw materials, so its output is fixed at 50,000 units. Price rises by 10%. What is its PES?
- 0
- 1
- 10