TheIBAxolotl
Price elasticity of supply (PES)
PES measures how responsive quantity supplied is to a change in the good's price.
\[\text{PES} = \frac{\%\Delta Q_s}{\%\Delta P}\]
PES is positive because supply curves slope upward.
- PES > 1: elastic supply
- PES < 1: inelastic supply
- PES = 1: unit elastic
- PES = 0: perfectly inelastic, a vertical supply curve (fixed quantity, like seats in a stadium on match day)
- PES = infinity: perfectly elastic, a horizontal supply curve
Diagram in words: P on the vertical axis and Q on the horizontal. A steep supply curve shows inelastic supply: a large price rise produces only a small increase in quantity. A flat supply curve shows elastic supply. Any straight supply line drawn from the origin has PES = 1, whatever its slope.
Worked example: the price of hand-made tables rises from USD 2,000 to USD 2,400 (+20%) and quantity supplied rises from 500 to 550 per year (+10%). PES \(= 10 / 20 = 0.5\): supply is inelastic, probably because skilled workers and seasoned timber cannot be increased quickly.
Determinants of PES
- Time period: in the very short run (momentary period) supply may be fixed. Over the short run firms can use existing capacity more intensively; in the long run they can build new capacity and new firms can enter. Supply becomes more elastic over time.
- Spare capacity: a firm with idle machines and workers can raise output quickly.
- Stocks (inventories): goods that can be stored allow supply to respond quickly from stock.
- Mobility of factors: if labour and capital can easily move into the industry, supply is more elastic.
- Length of the production process: goods that take a long time to make (wine, timber, apartment buildings) have inelastic supply.
Why PES matters
When demand shifts, PES decides whether the effect shows up mainly in price or in quantity. With inelastic supply, a rise in demand mostly raises the price; with elastic supply, it mostly raises quantity. This explains why house prices can soar in cities where building land is scarce, while prices of mass-produced goods barely move when demand grows.
(HL) Primary commodities versus manufactured goods
Primary commodities tend to have low PES because:
- crops take months to grow and trees or mines take years to bring into production;
- many farm products are perishable and hard to store;
- land and equipment are specialised, so factors cannot switch quickly.
Manufactured goods usually have higher PES: factories can add shifts, hold stocks and draw on more mobile factors.
Combined effect (HL): primary commodities tend to have both low PED and low PES. When either curve shifts (a drought cuts supply, or a boom raises demand), prices swing sharply. Producers' incomes become unstable, which hurts economies that depend on exporting a few commodities.
Common mistakes
- Writing PES as negative. It is positive for normal supply curves.
- Thinking a steeper-looking line through the origin is less elastic. All straight lines through the origin have PES = 1.
- Forgetting time: one figure for PES applies only to a given period.
Exam tips
- 10-mark questions: use two diagrams (inelastic and elastic supply) facing the same demand increase, and show how the split between price and quantity changes. Name the determinants relevant to the context.
- 15-mark questions: PES often supports an evaluation of commodity dependence or housing policy. Discuss how time and spare capacity change outcomes, and suggest responses such as buffer stocks, diversification or planning reform.
- In calculations, state whether supply is elastic or inelastic and give one reason linked to the case.