Elasticity of Supply

Dr. Mayeth T. Salandanan

 Price Elasticity of Supply

• PES measures the responsiveness of quantity supplied to

a change in price

• Formula:

percentage change in quantity supplied

percentage change in price
 Elasticity of Supply

• The law of supply states that there is a direct relationship

between the quantity supplied and the price of a commodity.
• The elasticity of supply establishes a quantitative relationship between
the supply of a commodity and it’s price. Hence, we can express the
numeral change in supply with the change in the price of a commodity
using the concept of elasticity. Note that elasticity can also be
calculated with respect to the other determinants of supply.
• Elastic supply
• If the firm is able to increase supply quickly in response to a change
in price, then supply is said to be price elastic in supply

• Inelastic supply
• If the firm is unable to increase supply quickly in response to a
change in price, then supply is said to be price inelastic in supply
 Factors Affecting Price Elasticity

• Time

• Weather conditions

• Ease of access to specialist equipment

• Planning permission and other government restrictions

• Stocks

• Spare capacity
 Price elasticity of Supply
• Price elasticity of supply (PES) is a numerical measure of
the responsiveness of the quantity supplied to a change in the
price of the product, ceteris paribus.
It is expressed as:
• PES = % change in quantity supplied
% change in price
• Since the relationship between the price and quantity supplied
is normally a direct one, the PES will tend to take on a positive
value.
 How to interpret price elasticity of supply

• If the numerical value of PES is greater than 1, then we say

that supply is relatively price elastic, i.e., supply is responsive
to a change in price.
• If the numerical value of PES is less than 1, then supply is
relatively price inelastic, i.e., supply is unresponsive to a
change in price.
Price elasticity of Supply
Price elasticity of Supply
 Factors influencing PES

• The key to understanding PES is supply flexibility – if businesses and

industries are more flexible in the way they operate, then supply tends to
be more elastic. The main influences on PES include the following:
• Spare production capacity:
•  If there is plenty of spare capacity then a business can increase output
without a rise in costs and supply will be elastic in response to a change
in demand. The supply of goods and services is most elastic during a
recession, when there is plenty of spare labour and capital resources.
 Factors influencing PES

• Stocks of finished products and components: 

• If stocks of raw materials and finished products are at a high level then
a firm is able to respond to a change in demand - supply will be elastic.
Conversely when stocks are low, dwindling supplies force prices higher
because of scarcity
 Factors influencing PES

• The ease and cost of factor substitution/mobility: 

• If both capital and labour are occupationally mobile then the elasticity
of supply for a product is higher than if capital and labour cannot easily
be switched. E.g. a printing press which can switch easily between
printing magazines and greetings cards. Or falling prices of cocoa
encourage farmers to switch into rubber production
 Factors influencing PES

• Time period and production speed: Supply is more price elastic

the longer the time period that a firm is allowed to adjust its
production levels. In some agricultural markets the momentary
supply is fixed and is determined mainly by planting decisions made
months before, and also climatic conditions, which affect the
production yield. In contrast the supply of milk is price elastic
because of a short time span from cows producing milk and products
reaching the market place.
 Knowledge of PES Information
Knowledge of the PES is important since it can go a long way to
explaining the speed and ease with which businesses can
respond to changed market conditions.
 Knowledge of PES information

• The diagram shows two supply curves. Se is relatively price

elastic; Si is relatively price inelastic. If there is an increase in
price for the product, the business with the supply curve Se
can respond more quickly than the one with the supply curve
Si.
 Knowledge of PES information

• Why is this? If both businesses are manufacturers then it

relates to the ease with which they can increase production.
• Where a business has spare capacity then
it can quickly hire more factors of production (labour
especially) to meet the increased demand.
 Knowledge of PES information

• For a business that is at full capacity, it is necessary to expand

its scale of operations and this can take time. It can also take
time where a business has to diversify into a new product
range if it is seen as worthwhile as a result of the price rise.
• Perfectly inelastic supply curve
• Unit elasticity
• Price elasticity of supply

• https://www.youtube.com/watch?v=7zpBnwHDe_k