The Allocation of Resources – Price Elasticity of Supply (PES) 📈
What is Price Elasticity of Supply?
Price Elasticity of Supply (PES) measures how much the quantity supplied of a good changes when its price changes. It tells us how responsive producers are to price changes.
Mathematically, it is expressed as:
\$Es = \dfrac{\% \Delta Qs}{\% \Delta P}\$
Where \$\% \Delta Q_s\$ is the percentage change in quantity supplied and \$\% \Delta P\$ is the percentage change in price.
How to Calculate PES
- Find the initial price (\$P1\$) and quantity supplied (\$Q1\$).
- Find the new price (\$P2\$) and new quantity supplied (\$Q2\$).
- Calculate the percentage changes:
- \$\% \Delta P = \dfrac{P2 - P1}{P_1} \times 100\%\$
- \$\% \Delta Qs = \dfrac{Q2 - Q1}{Q1} \times 100\%\$
- Divide the percentage change in quantity by the percentage change in price to get PES.
Different Types of Supply Elasticity
| Elasticity Type | PES Value | Supply Response |
|---|
| Perfectly Elastic | ∞ | Quantity supplied changes a lot for any tiny price change. Think of a market where producers can instantly increase output. |
| Elastic | >1 | Quantity supplied changes more than the price change. Example: A new factory can ramp up production quickly. |
| Unit Elastic | 1 | Quantity supplied changes proportionally to the price change. |
| Inelastic | <1 | Quantity supplied changes less than the price change. Example: A farmer with limited land can’t increase crop output quickly. |
| Perfectly Inelastic | 0 | Quantity supplied stays the same no matter what the price does. Think of a rare collectible that can’t be produced more. |
Drawing Supply Curves
- Plot price on the vertical axis and quantity supplied on the horizontal axis.
- For a perfectly elastic supply, draw a horizontal line at the price level where producers are willing to supply any quantity.
- For an elastic supply, draw a steep upward‑sloping line that rises quickly as price increases.
- For a unit elastic supply, the slope is moderate, rising at a constant rate.
- For an inelastic supply, the line is steep, indicating little change in quantity even if price rises.
- For a perfectly inelastic supply, draw a vertical line at the fixed quantity.
Interpreting Diagrams with Different PES
Let’s use a simple example of a toy factory.
- 📦 Elastic Supply: If the price of toys rises from \$10 to \$12, the factory can quickly add more workers and machines, increasing output from 100 to 150 units. PES > 1.
- 🏗️ Inelastic Supply: If the price rises from \$10 to \$12, the factory has limited space and can only increase output from 100 to 110 units. PES < 1.
- 🛠️ Perfectly Elastic Supply: Imagine a market where any price above \$10 triggers unlimited production because the factory has spare capacity. The supply curve is a flat line at \$10.
- 🧱 Perfectly Inelastic Supply: Think of a handcrafted item that can only be produced in a single batch of 50 units, regardless of price. The supply curve is a vertical line at 50 units.
Key Takeaways for 15‑Year‑Olds
- 💡 PES tells us how fast producers can respond to price changes.
- 🔍 A higher PES means a steeper supply curve.
- 🧩 Remember the analogy: Water faucet – the more you turn the knob (price), the more water (quantity) comes out if the faucet is elastic.
- 📚 Practice drawing supply curves for different PES values to see how the shape changes.
- 🤝 Understanding PES helps explain real‑world situations like why some products become scarce when prices rise.