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Chapter 12

Price elasticity of supply (PES) measures how responsive the quantity supplied is to changes in price, calculated similarly to price elasticity of demand. PES can indicate elastic or inelastic supply, with elastic supply having a PES greater than 1 and inelastic supply having a PES less than 1. Key determinants of PES include production time, cost of altering supply, and storage feasibility, impacting decision-making for consumers and suppliers.

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8 views21 pages

Chapter 12

Price elasticity of supply (PES) measures how responsive the quantity supplied is to changes in price, calculated similarly to price elasticity of demand. PES can indicate elastic or inelastic supply, with elastic supply having a PES greater than 1 and inelastic supply having a PES less than 1. Key determinants of PES include production time, cost of altering supply, and storage feasibility, impacting decision-making for consumers and suppliers.

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Mae L
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© All Rights Reserved
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12.

1 Definition of price elasticity of supply:


• Price elasticity of supply (PES) - a measure of the
responsiveness of the quantity supplied to a change in price

• It measures the extent to which the quantity supplied changes


when the price of a product changes.
12.2 Calculating PES:
• PES is calculated in the same way as price elasticity of demand
(PED).
12:3 Interpretation of PES:
• As the quantity supplied and price are directly related, PES is a
positive figure.
• The figure indicates the degree of responsiveness of the
quantity supplied to a change in price.
• The higher the figure, the more responsive supply is.
• A PES of 2.6, for example, means that a 1% rise in price will
cause a 2.6% extension in supply.
12.4 Elastic and inelastic supply
• Elastic supply is when the percentage change in quantity
supplied is greater than the percentage change in price. PES is
greater than 1, but less than infinity. The higher the figure, the
more elastic supply is.
• Inelastic supply is when the percentage change in quantity
supplied is less than the percentage change in price and so
PES is less than 1, but greater than zero.
12.5 Determinants of price elasticity of
supply
• There are three main factors which determine the PES of a
product:
• the time taken to produce it
• the cost of altering its supply and
• the feasibility of storing it
• Perfectly inelastic supply
• when a change in price has no effect on the quantity supplied
• Perfectly elastic supply
• When a change in price causes a complete change in quantity
supplied
• Unit PES
• When a change in price causes an equal percentage change in the
quantity supplied
12.7 Implications of PES for decision making
• Consumers benefit from supply being elastic, because it means
the supply is responsive to consumer demand. If demand
increases, price will rise. If supply is elastic, the quantity
supplied will rise by a greater percentage than the change in
price.

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