factors affecting price elasticity of supply

Price Elasticity of Supply (PES)

Definition: the percentage change in the quantity supplied of a good in response to a one‑percent change in its market price, ceteris paribus (all other factors held constant).

Formula:

\[ E_s \;=\; \frac{\%\Delta Q_s}{\%\Delta P} \]

Because the supply curve slopes upward, the coefficient is normally **positive**. Its magnitude tells us how responsive supply is to price changes.

Interpreting the Coefficient

• Elastic supply ( \(E_s > 1\) ): quantity supplied changes by a larger proportion than price.
• Unitary elastic supply ( \(E_s = 1\) ): quantity supplied changes by the same proportion as price.
• Inelastic supply ( \(E_s < 1\) ): quantity supplied changes by a smaller proportion than price.

Key Concepts Linked to PES

• Margin: a firm produces an additional unit only if the extra revenue (the market price) exceeds the extra cost (marginal cost). PES indicates how large the marginal response will be when price changes.
• Time horizon: short‑run – some inputs are fixed; long‑run – all inputs can be varied. Time is both a determinant of PES and a separate concept that must be highlighted in analysis.
• Equilibrium adjustment: a change in PES shifts the supply curve, moving the market to a new equilibrium price and quantity.
• Allocative efficiency: when supply is elastic, the market can quickly move toward the equilibrium that maximises total welfare; an inelastic supply can cause persistent shortages or surpluses.

Determinants of PES (ceteris paribus)

Factor	Why it matters (ceteris paribus)	Typical effect on PES	Syllabus link (Cambridge 9708)
Time horizon (short‑run vs long‑run)	In the short‑run some inputs are fixed; in the long‑run all inputs can be varied.	Long‑run supply is more elastic.	2.3 (b) – “short‑run and long‑run elasticity of supply”.
Availability of inputs	Ease of obtaining raw materials, labour, and capital determines how quickly output can be expanded.	Abundant, easily substitutable inputs → more elastic.	2.3 (c) – “availability of inputs”.
Production capacity (spare vs full utilisation)	Firms operating below capacity have idle plant that can be brought into use quickly.	Spare capacity → more elastic; full capacity → inelastic.	2.3 (c) – “capacity utilisation”.
Mobility of factors of production	Speed with which labour and capital can move between firms, industries or regions.	High mobility → more elastic.	2.3 (c) – “mobility of factors”.
Complexity of the production process	Lengthy, technically demanding processes limit the speed of output adjustment.	Simple, short processes → more elastic; complex processes → inelastic.	2.3 (c) – “complexity of production”.
Storage possibility	If a good can be stored without loss, firms can stock‑pile when prices are high and release when prices fall.	Storable goods (e.g., wheat, oil) → more elastic.	2.3 (c) – “storage”.
Regulatory & institutional constraints	Licences, quotas, environmental rules or price controls restrict how much firms can produce.	Stringent constraints → more inelastic.	2.3 (c) – “government regulation”.

Quantitative Illustration

Assume a market price rises by 10 %.

Case	PES	ΔQs (percentage)	Interpretation
Inelastic supply (short‑run)	0.4	0.4 × 10 % = 4 %	Quantity supplied rises only modestly; price increase creates a noticeable shortage.
Elastic supply (long‑run)	1.6	1.6 × 10 % = 16 %	Quantity supplied expands strongly; the market quickly approaches a new equilibrium.

Graphical Representation

Implications for Policy & Business Decision‑Making

1. Tax incidence (specific indirect taxes): Goods with inelastic supply bear a larger share of a tax burden because producers cannot quickly increase output to offset the tax.
2. Price controls: A minimum price floor is more effective when supply is inelastic; producers cannot raise output to exploit the higher price, leading to a persistent surplus.
3. Supply‑side policy (Cambridge topic 5.4): Measures such as training, infrastructure investment, deregulation or improving factor mobility increase PES, making fiscal stimulus more potent and helping shift the SRAS curve rightward.
4. AD/AS analysis (topic 4.3): A rise in PES flattens the SRAS curve, so a given shift in aggregate demand produces a smaller change in price and a larger change in output – a key consideration for macro‑policy evaluation.
5. Investment planning: Industries with highly elastic supply can expand output quickly in response to favourable price signals, attracting more private investment.
6. Risk management: Firms producing goods with inelastic supply face higher revenue volatility when market prices fluctuate, prompting the use of hedging or diversification strategies.

Key Take‑aways

• The PES is always positive; its magnitude (>1, =1, <1) indicates the degree of responsiveness.
• Time horizon, input availability, capacity utilisation, factor mobility, production complexity, storage possibilities, and regulatory constraints are the main determinants.
• These determinants explain how rapidly firms can adjust output, which in turn influences equilibrium adjustment, allocative efficiency, and the effectiveness of government policies (taxes, price controls, supply‑side measures) and business decisions.
• Understanding PES is essential for linking micro‑economic analysis (supply response) to macro‑economic outcomes (AD/AS shifts, overall economic growth).