Measuring responsiveness of supply
Price elasticity of supply (PES) measures the responsiveness of the quantity supplied of a good to a change in its price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price. Supply tends to be more elastic when producers can easily and quickly adjust output, and more inelastic when production takes time or resources are difficult to obtain.
Formula and interpretation
PES = (% change in quantity supplied) ÷ (% change in price)
If PES is greater than 1, supply is elastic; producers respond strongly to price changes. If PES is less than 1, supply is inelastic; producers find it harder to change output. Perfectly inelastic supply (PES = 0) means quantity supplied is fixed regardless of price. Perfectly elastic supply implies producers will supply any amount at a given price.
Determinants of elasticity
Several factors influence the elasticity of supply:
- Availability of spare capacity – firms with unused capacity can increase output quickly, making supply more elastic.
- Stock levels – high inventories allow firms to respond quickly to price changes.
- Time period – supply is more elastic in the long run when firms can invest in extra capacity or new technology.
- Ease of factor mobility – the easier it is to reallocate resources between products, the more elastic the supply.
- Nature of the product – perishable goods (e.g. fresh vegetables) have inelastic supply because they cannot be stored for long.
| Elasticity value | Description | Example |
|---|---|---|
| PES > 1 (elastic) | Quantity supplied responds more than proportionally to price changes | Mass‑produced goods with spare capacity |
| PES < 1 (inelastic) | Quantity supplied responds less than proportionally to price changes | Unique goods, goods requiring specialised labour or equipment |
| PES = 1 (unitary) | Quantity supplied changes in the same proportion as price | Many manufactured goods in the medium term |
| PES = 0 (perfectly inelastic) | Supply is fixed regardless of price | Tickets for a concert with a fixed number of seats |
| PES = ∞ (perfectly elastic) | Firms will supply any amount at a given price | Hypothetical scenario under perfect competition |
Understanding PES is useful for policy makers and firms. If supply is inelastic, taxes on producers may lead to higher prices without greatly reducing output. Where supply is elastic, firms can expand quickly in response to higher prices, helping to stabilise markets.
Calculation example
Suppose the price of wheat rises from $200 to $220 per tonne (a 10% increase) and farmers increase their output from 1 000 to 1 050 tonnes (a 5% increase). The price elasticity of supply is:
PES = (% change in quantity supplied) ÷ (% change in price) = 5% ÷ 10% = 0.5
A PES of 0.5 indicates inelastic supply: farmers cannot substantially increase output in the short run because it takes time to plant more crops and they may have limited land. Policymakers seeking to stabilise food prices might therefore focus on improving storage and import logistics rather than expecting domestic producers to respond quickly.
