Price Elasticity of Supply
Price Elasticity of Supply (PES)
Price elasticity of supply shows how quickly and easily producers can increase or decrease the amount they supply when the price changes.
Two main types:
1. Price Elastic Supply
Producers can increase supply quickly and easily when price rises.
No big delays.
This helps firms respond fast and stay competitive.
2. Price Inelastic Supply
Producers cannot change supply quickly.
It’s hard to increase production in a short time even if price goes up.
Determinants of Price Elasticity of Supply (PES)
1. Spare Capacity
If a firm has extra machines/workers not being used, it can produce more easily.→ Elastic
2. Level of Stocks (Inventory)
If a firm has raw materials or finished goods stored, it can supply more quickly.→ Elastic
If goods spoil fast (like milk), they can’t be stored.→ Inelastic
3. Number of Producers
More firms in the industry = supply can expand easily.→ Elastic
Few firms (like medicines) = hard to increase supply.→ Inelastic
4. Time Period
Short run: Can’t change production quickly.→ Inelastic
Long run: Firms can adjust everything (workers, machines, etc.).→ Elastic
5. Ease of Factor Substitution
If workers and machines can switch to making something else easily.→ Elastic
If they cannot switch.→ Inelastic
Significance of PES for Decision Makers – Simple Note
Producers usually