A) Understanding price elasticity of supply

Price elasticity of supply measures the responsiveness of quantity supplied to a change in price.

If quantity supplied changes by a greater percentage than the change in price, supply is relatively elastic. If quantity supplied changes by a smaller percentage than the change in price, supply is relatively inelastic.

B) Calculating price elasticity of supply

Price elasticity of supply is calculated using the following formula:

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

A higher PES value means that supply is more responsive to a change in price.

C) Interpreting price elasticity of supply

• PES = 0 – perfectly inelastic supply.
• PES between 0 and +1 – relatively inelastic supply.
• PES greater than +1 – relatively elastic supply.
• PES = ∞ – perfectly elastic supply.

When supply is relatively inelastic, even a relatively large change in price results in a smaller proportionate change in quantity supplied.

When supply is relatively elastic, firms are able to increase quantity supplied by a greater proportion when price rises.

D) Factors that influence price elasticity of supply

• Production lag – Some products take much longer to produce than others. For example, agricultural products such as wheat take time to grow, so firms cannot immediately increase supply when price rises. This makes supply more inelastic.
• Spare capacity – A firm with spare labour or capital can increase production more easily when price rises. A firm already operating at full capacity will find it more difficult to increase supply.

What the full guide adds

For this topic, the full AS guide also covers:

• The substitutability of factors of production and how easily firms can move resources between different products.
• The importance of stocks and how existing inventories can allow firms to respond quickly to changes in price.
• Product complexity and why more complicated products can take longer to increase in supply.
• The distinction between the short run and long run and why supply generally becomes more elastic when firms have more time to adjust all their factors of production.
• Fuller examples showing how each factor can make supply more elastic or more inelastic.