Price Elasticity of Supply (PES)

PES measures the responsiveness of quantity supplied to a change in price.

Price Elastic Supply: If a small change in price causes a large change in quantity supplied by a producer, their supply for that product is said to be price elastic.

Price Inelastic Supply: If a small change in price causes a small change in quantity supplied by a producer, their supply for that product is said to be price inelastic.

PES= % change in quantity supplied / % change in price

Determinants of PES

1. The availability of stock of finished goods and components

Firms with a large amount of stock can increase the supply of their products quickly and easily. In case there is an unexpected increase in demand, firms hold a stock of goods in reserve.

2. Degree of unused or 'spare' production capacity

Some firms may be able to increase the output of their goods or services relatively faster by keeping extra or spare machinery. For example, they can also ask employees to work longer hours or overtime.

3. Time period required to adjust the scale of production

The supply of a product will be less elastic the longer the time period its producers require to increase their output. At any given point in time, the supply for a product will be momentarily fixed. Supply will be unable to respond immediately.

If a firm is not able to increase the quantity it produces and supplies of its product in the short run, it will be depicted by a straight upwards line and known to be PERFECTLY PRICE INELASTIC SUPPLY.

4. Mobility and Availability of Factors of Production

The more easy it is to employ more factors of production, the more price elastic the supply will be. However, if an economy is already using most of its scarce resources, firms will find it difficult and also more costly to buy resources/hire factors of production. Thus the supply for products in that economy will be relatively price inelastic.

Significance of knowledge of PES

It is important for firms and consumers to know how quickly and effectively suppliers can respond to changing market conditions. Most firms will want to expand their supply as quickly as possible to take advantage of an increase in demand and the prices of their products. Increased demand means more customers, sales, and profits. High price elasticity of supply is therefore desirable for many firms. The supply of many items that are necessities is inelastic.

Actions a firm may take to increase its price elasticity of supply

• Increasing storage to keep stocks of its products

• Investing in additional and spare productive capacity

• Employing the latest production equipment and processes

• Training its workers in new skills so they become more mobile and undertake a wider variety of tasks.

How does knowledge of PES help a government

The low price elasticity of many agricultural products means that therefore their prices and incomes are volatile. Governments and farmers should be aware of this and take the necessary actions. For example, government could provide subsidies to the farmers and farmers should take some of their income to support their business.