PES is the responsiveness in Supply to a change in the price of a product
%change in quantitysupplied/%change in price
This type of elasticity will always be positive as a producers main aim is to maximise profits, this therefore would mean that the higher the price, the more is supplied by a producer.
- Between 0 and 1: This suggests that supply is inelestic, this means that supply is not very responsive to a change in price of a product
- Greater than 1: Supply is elastic, therefore producers are able to respond to a change in price and supply more very quickly if price rises
- Equal to 1: here a change in price is proportional to a change in quantity supplied
What determines the price elasticity of supply?
- Availability of stocks of the product: The speed at which goods can be released depends if the stock is available, the stock can be stored in warehouses or businesses such as Tesco can have “buffer stock” which means that they have extra stock to cope with sudden changes in demand, if this is the case, then supply is fairly PES elastic, in which an increase in price would mean that these businesses can quickly supply more.
- Availability of factors of production: Labour tends to be the most available factor of production, so that means that if the price increases then more can be produced, in this instance supply is thought to be PES elastic. However for some businesses it may be the availability of capital that determines the output produced, this maybe because extra capital will need to be found and installed, workers will need to be trained to use the equipment, and this would mean that supply would be inelastic
- Time: When supply takes more time adjust, it makes it more inelastic as it is less responsive to a change in price, however in the long term supply would be more elastic as more would be available.
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