📈 The Allocation of Resources – Price Elasticity of Supply (PES)
What is PES?
PES measures how much the quantity supplied of a good changes when its price changes.
It is calculated as:
\$PES = \dfrac{\% \text{ change in quantity supplied}}{\% \text{ change in price}}\$
Interpretation:
- If PES > 1 – supply is elastic (big response).
- If PES < 1 – supply is inelastic (small response).
- If PES = 1 – supply is unit‑elastic.
💡 Main Influences on Supply Elasticity
Think of supply like a rubber band: some goods stretch easily when the price changes, others don’t. The main factors are:
Time Horizon – Short‑run vs. Long‑run
- Short‑run: producers can’t change production levels quickly (e.g., a bakery can’t instantly double its ovens). Supply tends to be inelastic.
- Long‑run: producers can add capacity, hire more workers, or buy new equipment. Supply becomes more elastic.
Availability of Inputs
- If raw materials are abundant and cheap, firms can increase output easily → elastic.
- If inputs are scarce or expensive, output rises slowly → inelastic.
Production Technology
- Advanced, flexible technology (e.g., modular factories) lets firms adjust output quickly → elastic.
- Fixed, specialised equipment (e.g., a steel mill) limits rapid changes → inelastic.
Capacity Utilisation
- When factories run below capacity, they can ramp up production with little cost → elastic.
- When at full capacity, extra output requires costly expansions → inelastic.
Market Structure & Competition
- In highly competitive markets, firms quickly respond to price changes → elastic.
- In monopolistic or oligopolistic markets, firms may be slow to adjust → inelastic.
📚 Example: Coffee Production
Short‑run: A coffee shop can’t instantly double its coffee beans supply because it needs more farmers and transport. So, when the price of coffee rises, the quantity supplied only increases a little – inelastic.
Long‑run: Over a few years, the shop can invest in new plantations and hire more workers. When the price rises, it can increase supply more substantially – elastic.
📊 Summary Table
| Factor | Effect on PES | Example |
|---|
| Time Horizon | Short‑run → Inelastic; Long‑run → Elastic | Farmers selling tomatoes |
| Input Availability | Abundant → Elastic; Scarce → Inelastic | Steel vs. Rare earth metals |
| Technology | Flexible → Elastic; Fixed → Inelastic | Modular factory vs. specialised machine |
| Capacity Utilisation | Below capacity → Elastic; Full capacity → Inelastic | Restaurant with empty tables vs. full house |
| Market Structure | Competitive → Elastic; Monopolistic → Inelastic | Multiple smartphone brands vs. single brand |
📝 Examination Tips
- Remember the formula for PES and practice calculating it with sample data.
- When answering “Is supply elastic or inelastic?” always mention at least two influencing factors.
- Use clear, concise language – teachers look for your understanding of the concepts, not just the answer.
- Include an example (real or hypothetical) to illustrate your point.
- Check your units: PES is dimensionless (a ratio of percentages).