Meaning and calculation

Price elasticity of supply (PES) is a measure of responsiveness that shows how strongly the quantity supplied changes when the product's price changes. It is calculated as:

Using the original values as the bases:

PES is normally non-negative because price and quantity supplied move in the same direction along a supply curve. When both decrease, both percentage changes are negative, leaving a positive ratio.

Suppose, for example, that quantity supplied rises from 500 to 575 units per week while price rises by 10%. Quantity supplied has increased by 15%, so PES is $15\% \div 10\% = 1.5$. Calculate the two percentage changes first, then divide. Don’t divide the absolute change in output by the absolute change in price because the units would not cancel.

The formula can also be rearranged:

If PES is 0.5 and price rises by 8%, quantity supplied rises by 4%. With an original quantity of 200 units per week, the new quantity is 208 units per week. Alternatively, if quantity supplied rises by 12% and PES is 1.5, the required price increase is 8%. Show the percentage-change step before converting it into a new price or quantity.

Degrees of PES

The theoretical range of PES runs from zero to infinity.

• Price-inelastic supply is a degree of responsiveness for which quantity supplied changes by a smaller percentage than price, so $0<\text{PES}<1$.
• Unit-elastic supply is a degree of responsiveness for which quantity supplied and price change by the same percentage, so $\text{PES}=1$.
• Price-elastic supply is a degree of responsiveness for which quantity supplied changes by a larger percentage than price, so $\text{PES}>1$.
• Perfectly price-inelastic supply is a limiting case in which quantity supplied is fixed regardless of price, so $\text{PES}=0$.
• Perfectly price-elastic supply is a limiting case in which suppliers will offer any quantity at one particular price but none below it, so $\text{PES}=\infty$.

For a given percentage change in price, a relatively elastic supply curve shows a larger percentage change in quantity supplied than a relatively inelastic curve. On a standard diagram, price appears on the vertical axis and quantity supplied on the horizontal axis. The curve is labelled $S$. Don’t judge elasticity from steepness alone unless the axes use comparable scales: elasticity depends on percentage changes, not simply the visual angle of a line.

Three important supply curves have constant PES throughout. A vertical supply curve is perfectly inelastic, while a horizontal supply curve is perfectly elastic. Any straight supply curve passing through the origin is unit elastic. For other straight supply curves, one passing through the price axis is elastic throughout its positive section. One passing through the quantity axis is inelastic throughout its positive section.

Determinants of PES

The practical question is simple: how easily can producers alter output when price changes?

• Time: Supply generally becomes more elastic when producers have longer to respond. Output may be fixed in the momentary period. During the short run, firms can vary some inputs, such as working hours or raw materials, but fixed facilities remain unchanged. In the long run, firms can expand factories, acquire equipment, train workers or enter and leave an industry.
• Mobility of factors of production: Factor mobility is the ease with which land, labour and capital can be transferred between productive uses. When employees and machinery can be reassigned quickly, firms can redirect resources towards the product whose price has risen. This makes supply more elastic. Highly specialized resources slow the adjustment.
• Unused capacity: Unused capacity is productive potential that a firm possesses but is not currently employing. A firm with idle machinery or available shifts can increase output without building new facilities first, so its supply is likely to be more elastic. Firms already operating near full capacity face a tighter constraint.
• Ability to store: Durable goods can be produced in advance and kept as inventories. If price rises, firms can release stocks quickly, making quantity supplied more responsive. Perishable products and services cannot usually be stored, so their supply tends to be less elastic.
• Rate at which costs increase: When extra output causes costs to rise rapidly, producers need a substantial price increase before expansion becomes worthwhile. Supply is therefore relatively inelastic. If firms can raise output with only a small increase in cost, they can respond to a modest price change, making supply more elastic.

These determinants often reinforce each other. A producer might have spare capacity, for example, yet still respond slowly because trained labour is unavailable or the necessary inputs cannot be stored.

Why primary commodities generally have lower PES

A primary commodity is a raw or lightly processed product obtained from agriculture, forestry, fishing or extractive activity. A manufactured product is a good created by transforming inputs through an industrial production process. Primary commodities generally have less price-elastic supply than manufactured products, especially in the short run.

The determinants of PES explain why:

• Long production periods: Crops need time to grow and livestock must mature. Locating and developing new mineral deposits also takes time, so a rise in the current price cannot immediately produce a larger harvest or open a new extraction site.
• Limited factor mobility: Suitable land, climate, water and mineral deposits are restricted to particular locations. Producers cannot easily transfer these resources into production of a commodity whose price has risen.
• Biological and natural constraints: Weather, growing seasons and the availability of natural resources limit how quickly output can respond. Producers usually have more direct control over factory processes.
• Capacity constraints: Raising primary output may require more land, irrigation systems, transport links or heavy equipment. Some manufacturers, in contrast, can first increase production by adding shifts or bringing idle machinery into use.
• Storage difficulties: Some primary products deteriorate quickly; others need costly controlled storage. Many manufactured products are more durable and can be kept as inventories, though this isn’t true in every case.
• Rapidly rising costs: Costs may rise sharply when producers begin extracting resources that are lower quality or harder to access. Manufacturers may be able to expand output at a steadier cost until they reach existing capacity.

“Generally” is the key word. A manufacturer using highly specialized machinery at full capacity may have inelastic supply. A storable commodity backed by large inventories may have more elastic supply. The result depends on the actual conditions and the time period considered.

Commodity-price volatility

Low PES helps explain the volatility of primary commodity prices. If demand rises, producers cannot increase quantity supplied quickly, so the market adjusts largely through a higher price. If demand falls, output may not fall straight away, leading to a comparatively large price decrease. Weather events or disruptions that cause supply shocks can make this instability worse.

For a commodity-dependent country, unstable export prices can cause fluctuations in export revenue, tax receipts, employment and foreign-exchange earnings. Their effects depend on the shock’s size and direction, the relevant demand elasticity, the availability of stocks, and whether the country has diversified into other activities. An investigation should therefore link observed price movements to shifts in demand or supply and to the relevant elasticities, rather than treating low PES as the sole cause.