Measure sellers' quantity response to their own price.
PES = percentage change in quantity supplied / percentage change in own price, other things equal. For the usual upward-sloping supply relationship it is positive: price and quantity supplied move together. PES above one is elastic, between zero and one is inelastic, and one is unit elastic. Perfectly inelastic supply has PES zero and a vertical curve; a horizontal curve represents the perfectly elastic limiting case. Do not confuse a change in quantity supplied along supply with a shift caused by costs, capacity or other determinants. State the percentage method for a two-point estimate.
- Formula
- PES = percentage change in quantity supplied / percentage change in own price.
- Magnitude
- PES above 1 is elastic: the quantity percentage response exceeds the price change. Between 0 and 1 it is inelastic: the response is smaller. At 1, the percentages are equal.
- Limits
- PES of zero means quantity supplied does not change with price: a vertical curve. In the perfectly elastic limiting model, different quantities are supplied at the same price: a horizontal curve.
Keep the supply relationship fixed
Own-price response
A higher price extends quantity supplied along the unchanged curve. This is what PES describes.
Non-price changes
New technology, input costs or entry may shift supply. A before-and-after ratio that includes those changes need not isolate PES.
Meaning of the coefficient
PES 3 means a proportional quantity response three times the price change over the stated comparison, not a shift by three units.
Worked example: A manufacturer responds to a higher price
With technology, input prices and other supply determinants fixed, the selling price rises by 5%. Quantity supplied rises from 200 to 230 units per week. For this exercise, use the original quantity as the percentage base and the given 5% price change.
- Quantity supplied rises by 30, which is 30/200 x 100 = 15%.
- PES = 15%/5% = 3. Supply is elastic over the stated response: quantity changes more than proportionately.
- This does not mean that supply shifted right by three units. It describes movement along the given supply relationship in response to own price.
- If the firm also installed new machinery, a quantity increase could reflect a supply shift. The two observations would no longer isolate this own-price response.
Watch out for this
PES tells us how much demand changes when sellers expand production.
PES measures quantity supplied responding to own price, with other supply determinants unchanged. It is not a demand elasticity.
Check your understanding
A question gives own price +12% and quantity supplied +3%, ceteris paribus. Which answer is correct?
- PES = 4, elastic.
- PES = -0.25, inelastic.
- PES = 0.25, inelastic.