Price Elasticity of Supply
Price Elasticity of Supply (PES) measures how much the quantity supplied of a product changes when its price changes.
It shows how responsive producers are to price changes.
Elastic Supply
Supply is price elastic when producers can increase production easily and quickly when the price rises.
This usually happens when:
Firms have spare capacity
Raw materials are easy to get
Production can be expanded quickly
Example:If the price of ice cream increases in summer, companies can quickly produce more.
Inelastic Supply
Supply is price inelastic when firms cannot easily change production even if the price changes.
This happens when:
Production takes a long time
Resources are limited
The product is difficult to produce
Example:If the price of oil increases, companies cannot immediately produce more oil because drilling takes time.
Why PES is Important
Helps businesses decide how much to produce.
Helps economists understand how markets respond to price changes.
Helps governments plan policies and taxes.