definition of price elasticity of supply (PES)

📈 Price Elasticity of Supply (PES)

Definition

The price elasticity of supply measures how much the quantity supplied of a good changes in response to a change in its price. It is always a positive number because higher prices usually encourage producers to supply more.

Formula

\$\varepsilons = \frac{\% \Delta Qs}{\% \Delta P}\$


where \$\% \Delta Q_s\$ is the percentage change in quantity supplied and \$\% \Delta P\$ is the percentage change in price.

Interpretation

  • Elastic supply (\$\varepsilon_s > 1\$): Quantity supplied changes by a larger percentage than the price change.

  • Unit‑elastic supply (\$\varepsilon_s = 1\$): Quantity supplied changes by the same percentage as the price.

  • Inelastic supply (\$\varepsilon_s < 1\$): Quantity supplied changes by a smaller percentage than the price.

Analogy & Example

📦 Pizza shop analogy: If the price of pizza rises, the shop can quickly bake more pizzas (elastic supply). If the price of a rare ingredient rises, the shop may not be able to increase production quickly (inelastic supply).

Concrete example: Suppose the price of oranges rises from £1 to £1.20 (a 20% increase). If the quantity supplied rises from 100 to 140 oranges (a 40% increase), then:


\$\varepsilon_s = \frac{40\%}{20\%} = 2\$

The supply is elastic.

Exam Tips

  • Always keep the elasticity of supply positive.

  • Use the formula and check the sign of the percentage changes.

  • Remember: higher price → higher quantity supplied (upward‑sloping supply curve).

  • When asked to classify supply, compare the elasticity value to 1.

  • For multiple‑choice questions, look for the option that matches the calculated elasticity.

  • In short answer, state the definition, give the formula, and interpret the result.

Quick Practice

Initial Price (£)New Price (£)Initial Quantity (units)New Quantity (units)PES
2.002.40150210\$\varepsilon_s = \frac{40\%}{20\%} = 2\$