Price Elasticity of Supply

Price elasticity of supply measures how the supply of a product varies with its price.

\(\text{PES} =\frac{\%\Delta QS}{\%\Delta P}\)

• Always positive

Elastic supply is better because the company can be responsive to a market in order to maximise profit.

Factors that impact PES

• Capacity utilisation - How close to full capacity is a firm/market operating.
  If there is lots of spare capacity, then supply will be elastic.
• Availability of stock - If there is a lot of spare stock then supply will be
  elastic and vice versa.
• Availability of raw materials - If raw materials are in short supply, this is
  likely to cause supply to be inelastic.
• Time - Over time, supply will be more elastic since firms are able to respond
  to higher prices by investing in more capital

Perfectly Inelastic Supply

Perfectly inelastic supply means that a fixed amount will be supplied regardless of the price level. An example could be the supply of the crown jewels - their price can vary but the quantity supplied won't change, there is always a fixed quantity of 1. Another example is carbon credits - there are a fixed amount given by the government and then firms have to compete for a fixed supply.

Perfectly Elastic Supply

Perfectly elastic supply means that supply will supply an infinite amount of good above/at a certain price level, but nothing below it. An example of perfectly elastic supply is imports - The world supply of a good has a fixed price, and changes in demand in a particular are insignificant compared to the world supply.