Calculation & Determinants of PES

Introducing price elasticity of supply

Introducing price elasticity of supply

• The law of supply states that when there is an increase in price (ceteris paribus), producers will increase the quantity supplied and vice versa

  • Economists are interested in how much the quantity supplied will increase

• Price elasticity of supply (PES) reveals how responsive the change in quantity supplied is to a change in price

  • The responsiveness is different for different types of products

Calculation of PES

• PES can be calculated using the following formula:

$\text{PES = }\frac{\% \mathrm{change} \mathrm{in} \mathrm{quantity} \mathrm{supplied}}{\% \mathrm{change} \mathrm{in} \mathrm{price}} = \frac{\%△ \mathrm{in}\hspace{0.17em}\mathrm{QS}}{\%△\mathrm{in} \mathrm{P}}$

• To calculate a % change, use the following formula:

$\% \mathrm{Change} = \frac{\mathrm{new} \mathrm{value} - \mathrm{old} \mathrm{value}}{\mathrm{old} \mathrm{value}} \times 100$ 

Drawing and interpreting PES values

Drawing and interpreting PES values

• The results of the price elasticity of supply calculation tell us how responsive producers are to a change in price

1. Price elastic supply

• The value of PES: 1 → ∞

• The quantity supplied changes more than proportionally to price

• Producers are very responsive to price changes

  • For example, a clothing factory in Bangladesh quickly increases T-shirt production when prices rise

2. Price inelastic supply

• The value of PES: 0 → 1

• The percentage change in quantity supplied is less than proportional to the percentage change in price

• Producers are relatively unresponsive to price changes

  • For example, banana growers in Ecuador cannot increase output quickly due to growing time

3. Perfectly elastic supply

• The value of PES: ∞

• The quantity supplied will fall to zero with any percentage change in price (highly theoretical elasticity)

• Producers will only sell at one price, and any change in price causes supply to drop to zero

  • For example, on international markets, a wheat exporter in Brazil may only sell at the global price

4. Perfectly inelastic supply

• The value of PES: 0

• The quantity supplied does not change at all, no matter the price

• For example, a stadium in Argentina with 50,000 seats can't supply more tickets, even if price rises

5. Unitary elasticity of supply

• The value of PES: 1

• The percentage change in quantity supplied is exactly equal to the percentage change in price

• Any supply curve that starts at the origin has unitary elasticity

  • S1, S2 and S3 all have a PES value equal to 1

  • The %∆ in P = %∆ in QS

• For example, a shoe manufacturer in Vietnam increases supply by 10% when price rises 10%

The determinants of PES

The determinants of PES

• Some products are more responsive to changes in price than others

• This responsiveness is known as Price Elasticity of Supply (PES)

• The factors that affect how responsive supply is, are called the determinants of PES

1. Mobility of the factors of production

• If producers can quickly switch resources (e.g., labour, capital) between products, then PES will be higher (elastic)

• If resources are specialised or fixed, then supply is less responsive (inelastic)

  • For example, if the price of hiking boots rises, a shoe manufacturer who can easily shift workers and machinery from making trainers to boots will have elastic supply

2. Availability of raw materials

• If raw materials are easily available, producers can respond quickly to price changes → elastic supply

• If materials are scarce or hard to obtain, supply cannot increase easily → inelastic supply

  • For example, a chocolate producer with limited access to cocoa beans may find it harder to increase supply when prices rise.

3. Ability to store stock

• If goods can be stored easily, producers can build up inventory and release more when prices rise → elastic supply

• If goods cannot be stored (e.g., fresh flowers), supply will be more inelastic

  • For example, producers of tinned food can respond quickly to price increases because the products can be stored for long periods

4. Spare capacity

• If a firm has unused capacity (idle machines, underused staff), it can increase output quickly when prices rise → elastic supply

• If operating at full capacity, it cannot easily raise production → inelastic supply

• For example, a car factory with extra machinery and space can respond rapidly to rising demand

5. Time period

• In the short run, supply is usually more inelastic because firms need time to adjust production

• In the long run, supply becomes more elastic as firms can invest in more resources and change production processes

• For example, avocado farmers cannot instantly grow more avocados when prices rise — but over time, they can plant more trees and expand supply