2.8 Price elasticity of Supply

What is price elasticity of supply?

Price elasticity of supply refers to the responsiveness of quantity supplied to a change in price. Also denoted as PES, its is calculated by dividing the percentage change in quantity suppled by the percentage change in price.

Interpreting PED

• When PES is higher than 1, the supply for that product/service is considered relatively elastic.
• When PES is lower than 1, the supply for that product/service is considered relatively inelastic.
• When PES is 1, supply for the product/service is considered unitary elastic.
• When PES is 0, the supply for that product/service is considered perfectly inelastic.
• When PES is infinite, the supply for that product/service is considered perfectly elastic.

Determinants of PES

• Mobility of resources – The more mobile the resources, the greater the PES
• Unused capacity – The more unused capacity, the greater the PES
• Storage capacity – The greater the storage capacity, the higher the PES
• Time to alter supply – The higher the time to alter supply, the greater the PES