Price elasticity of supply (PES) measures the relationship between change in quantity supplied and a change in price.
If supply is elastic, producers can increase output without a rise in cost or a time delay
If supply is inelastic, firms find it hard to change production in a given time period.
Percentage change in quantity supplied divided by the percentage change in price
When PES > 1, then supply is price elastic
When PES < 1, then supply is price inelastic
When PES = 0, supply is perfectly inelastic
When PES = infinity, supply is perfectly elastic
What factors affect the elasticity of supply?
Factor substitution possibilities: When factor substitution is possible and can be achieved at a low cost, supply will be elastic. When factors are specialized, substitution may be harder and thus will be inelastic.
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.
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 in the market.
Time period and production speed: Supply is more price elastic the longer the time period that a firm is allowed to adjust its production…