Overview
This lecture explains price elasticity of supply (PES), including its calculation, interpretation, diagrams, and the key determinants that affect PES.
Definition & Formula
- Price elasticity of supply (PES) measures the responsiveness of quantity supplied to a change in price.
- Formula: PES = (% Change in Quantity Supplied) / (% Change in Price).
- Use Q before P in the formula to avoid mistakes.
- Percentage change formula: (Difference between two numbers / Original number) × 100.
Interpreting PES Values
- PES is always positive due to the law of supply; ignore the sign.
- PES > 1: Supply is price elastic (quantity supplied changes proportionately more than price).
- PES < 1: Supply is price inelastic (quantity supplied changes proportionately less than price).
- PES = 0: Perfectly price inelastic (quantity supplied does not change with price).
- PES = ∞: Perfectly price elastic.
- PES = 1: Unit price elastic.
Example Calculation
- Price increases from £40 to £60 (50% increase).
- Quantity supplied increases from 150 to 180 barrels (20% increase).
- PES = 0.4 (price inelastic supply).
Supply Curve Diagrams
- Price inelastic supply: Steep supply curve.
- Price elastic supply: Shallow supply curve.
- Perfectly price inelastic: Vertical supply curve.
- Perfectly price elastic: Horizontal supply curve.
Determinants of PES ("SSSST" Memory Trick: 3 S’s + 2 T’s)
- Production lag: Longer lag means more price inelastic supply.
- Stocks: Higher stock levels make supply more price elastic.
- Spare capacity: More spare capacity increases price elasticity of supply.
- Substitutability of factors: Greater substitutability means more price elastic supply.
- Time period: Short run—supply is inelastic; long run—supply is more elastic.
Key Terms & Definitions
- Price elasticity of supply (PES) — The responsiveness of quantity supplied to a change in price.
- Law of supply — When price rises, quantity supplied rises, and vice versa.
- Production lag — Delay before increased production responds to price changes.
- Stocks — Inventory held by a firm.
- Spare capacity — Unused productive resources available to increase output.
- Substitutability — How easily factors of production can be switched between uses.
- Short-run/Long-run — Short run has fixed production factors; long run has all variable factors.
Action Items / Next Steps
- Practice calculating PES using sample data.
- Memorize the five determinants of PES using the “SSSST” trick.
- Review how to draw and interpret supply curves for different elasticities.