thumb|Price elasticity of supply using the [[Arc elasticity|midpoint method.]]

The price elasticity of supply (PES or E<sub>s</sub>) is commonly known as “a measure used in economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price.” Price elasticity of supply, in application, is the percentage change of the quantity supplied resulting from a 1% change in price. Alternatively, PES is the percentage change in the quantity supplied divided by the percentage change in price.

When PES is less than one, the supply of the good can be described as inelastic. When price elasticity of supply is greater than one, the supply can be described as elastic. An elasticity of zero indicates that quantity supplied does not respond to a price change: the good is "fixed" in supply. Such goods often have no labor component or are not produced, limiting the short run prospects of expansion. If the elasticity is exactly one, the good is said to be unit-elastic. Differing from price elasticity of demand, price elasticities of supply are generally positive numbers because an increase in the price of a good motivates producers to produce more, as relative marginal revenue increases.

The quantity of goods supplied can, in the short term, be different from the amount produced, as manufacturers will have stocks which they can build up or run down.

Definition and real-life example

The slope of a supply curve relates changes in price to changes in quantity supplied. A steeper curve means that price changes are correlated with relatively small quantity changes. Steep supply curves derive that the quantity supplied by producers are not particularly sensitive to price changes. Oppositely, flatter supply curves imply that price changes are associated with large quantity changes. Markets with flat supply curves will see large movements in quantity supplied as prices change.

The concept of elasticity expresses the responsiveness of a value to changes in another (particularly, responsiveness of quantities to prices). An elasticity is the ratio of the percentage change in one value to the percentage change in another. The concept of elasticity applies to demand and supply curves and agents like producers and consumers.

Determinants

;Availability of raw materials: For example, availability may cap the amount of gold that can be produced in a country regardless of price. Likewise, the price of Van Gogh paintings is unlikely to affect their supply.<!-- Have you not a slightly less better example? -->

;Length and complexity of production: Much depends on the complexity of the production process. Textile production is relatively simple. The labour is largely unskilled and production facilities are little more than buildings&nbsp;– no special structures are needed. Thus the PES for textiles is elastic.

;Mobility of factors: If the factors of production are easily available and if a producer producing one good can switch their resources and put it towards the creation of a product in demand, then it can be said that the PES is relatively elastic. The inverse applies to this, to make it relatively inelastic.

;Time to respond: The more time a producer has to respond to price changes the more elastic the supply. Supply is normally more elastic in the long run than in the short run for produced goods, since it is generally assumed that in the long run all factors of production can be utilised to increase supply, whereas in the short run only labor can be increased, and even then, changes may be prohibitively costly. Curves which cut through the positive part of the quantity axis and have positive quantity supplied (Q = a) even if the price is zero have a > 0 and hence always have inelastic supply. Curves which go through the origin have a = 0 and hence have an elasticity of 1.

When looking at the price elasticity of supply, there are five types. The five types are perfectly inelastic supply, relatively inelastic supply, unit elastic supply, relatively elastic supply, and perfectly elastic supply. These five types help to show how different products supply quantity changes when faced with changed in price.

Perfectly inelastic supply: This is when the E<sub>s</sub> formula equals to zero, meaning that there is no change in the supply when there are price changes. This can be the case where there is a limited quantity of supply, for example, if there is only 200 of a certain product made and there will never be any more made, there will be no increase or decrease in the quantity of supply.

Relatively inelastic supply: This is when the E<sub>s</sub> formula gives a result between zero and one, meaning that when there is a change in price, the percentage change in supply is lower than the percentage change in price. For example, if a product costs $1 and then increases to $1.10 the increase in price is 10% and therefore the change in supply will be less than 10%.

  • Gasoline: 1.61 (Short run)
  • 1.0 (Long run)
  • Land: 0, except when land reclamation is taking place
  • Labour: 0.7-1.8

See also

  • Price elasticity of demand
  • Cross elasticity of demand

Notes

References

  • Research and Education Association, The Economics Problem Solver. REA 1995.

fr:Élasticité de l'offre