Price elasticity of supply (PES)

What is PES?

Price elasticity of supply measures how much quantity supplied responds to a change in price.

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

Because price and quantity supplied move in the same direction, PES is normally positive. That is a quick way to check you have not confused it with PED, which is negative.

What makes supply elastic or inelastic?

Time is the most important factor, and it deserves its own explanation.

• Immediately, supply is almost fixed. A farmer whose crop is already harvested cannot grow more today at any price.
• In the short run, output can be raised a little, overtime, extra shifts, using machines more intensively, so supply is inelastic but not completely fixed.
• In the long run, firms can build new factories and new firms can enter, so supply is much more elastic.

The other determinants:

• Spare capacity. A factory working below full capacity can raise output quickly, so supply is elastic. A factory already at full capacity cannot, whatever the price.
• Stocks. If a firm can store goods; it can release them straight away when the price rises, elastic supply. This is why perishable goods like milk and fresh fruit have inelastic supply.
• How easily resources can be moved. If workers and machines can be switched to this product easily, supply is elastic. Highly specialised equipment or skills make it inelastic.
• Length of the production process. Goods that take a long time to produce, timber, mined metals, tree crops, have inelastic supply, because production cannot be rushed.
• Ease of entering the market. If new firms can start up easily, market supply responds more.

Primary products versus manufactured goods

This comparison comes up often, and it links to development topics later in the course.

Why this matters. Primary products often have both inelastic supply and inelastic demand. So when either curve shifts, almost all of the change shows up in the price rather than the quantity. That is why farm prices and farm incomes are so unstable, and why many developing countries that depend on exporting primary products face unpredictable earnings.

Worked example

The price of wheat rises from $200 to $240 per tonne, and the quantity supplied rises from 50,000 to 55,000 tonnes.

% change in quantity supplied = 5,000 ÷ 50,000 × 100 = 10%
% change in price = 40 ÷ 200 × 100 = 20%
PES = 10 ÷ 20 = 0.5

PES is less than 1, so supply is inelastic. Farmers cannot grow much more wheat within a season, the land is already planted and the crop cycle cannot be sped up.

Now interpret it, which is where the remaining marks are:

Because supply is inelastic, a rise in demand for wheat would push the price up sharply while the quantity sold barely changed. Over several years, however, farmers can plant more land, so PES rises and the same rise in demand would produce more wheat and a smaller price rise.

Common exam mistakes

• Giving PES a negative sign. It is normally positive.
• Confusing PES with PED, or applying the total revenue test to PES, that test belongs to PED.
• Saying "supply is inelastic" without saying over what time period.
• Mixing up spare capacity (ability to produce more) with stocks (goods already made).
• Calculating PES and then not explaining what it means.

Exam technique

Show the formula, substitute, then calculate. You get method marks even if the arithmetic goes wrong.

Then add a sentence saying whether supply is elastic or inelastic and why, usually because of time, capacity or the type of product.

PES is often the hidden reason behind a market outcome. If a question asks why a price rose so sharply after a change in demand, the answer is usually that supply is inelastic.

Building an answer

4 marks, "A 20% rise in price causes a 10% rise in quantity supplied. Calculate PES and comment."

PES = percentage change in quantity supplied ÷ percentage change in price = 10 ÷ 20 = 0.5.
Since 0.5 is less than 1, supply is price inelastic: quantity supplied changed proportionally less than price.

PES is normally positive, because supply slopes upward, unlike PED, there is no sign to explain away.

6 marks, "Analyse why the supply of oil is more elastic in the long run than the short run."

In the short run, capacity is fixed. Wells, rigs and refineries take years to build, so however far the price rises, producers cannot bring much more oil to market, supply is close to vertical.
Over the long run, high prices make new exploration and new extraction technology profitable, so capacity expands and quantity supplied responds far more.
The consequence for the market is that a demand shock produces a very large price change in the short run and a much smaller one once supply has had time to adjust.

What makes supply elastic

Agriculture is the standard inelastic case: a crop planted months ago cannot be increased because the price rose today.

A real case to quote

Semiconductors, 2021. Demand rose sharply while a new fabrication plant takes two to three years and billions to build, so short-run supply was almost perfectly inelastic. Prices and lead times rose dramatically, and car manufacturers halted production lines. By 2023 new capacity had arrived and prices fell back, the long run doing exactly what theory says it does.

Quick revision

• PES = % change in quantity supplied ÷ % change in price.
• Normally positive; above 1 = elastic, below 1 = inelastic.
• Time is the main factor: fixed immediately, limited in the short run, elastic in the long run.
• Also: spare capacity, stocks, mobility of resources, length of production, ease of entry.
• Primary products have low PES; manufactured goods higher.
• Inelastic supply means demand changes hit the price, not the quantity.

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