Price Elasticity of Supply - (Supply)

Price elasticity of supply (PES) measures the responsiveness of quantity supplied to a change in the good's own price (1). It is calculated as the percentage change in quantity supplied divided by the percentage change in price (1).

% change in price = (52 − 40)/40 × 100 = +30% (1).

% change in quantity supplied = (5,600 − 5,000)/5,000 × 100 = +12% (1).

PES = %ΔQs ÷ %ΔP = +12% ÷ +30% = +0.4 (1).

Since PES = 0.4 < 1, supply is price inelastic — quantity supplied changes proportionately less than price (1).

Supply is price inelastic when PES < 1 — quantity supplied changes proportionately less than price. Two features of fresh fish explain why this holds in the short run.

Reason 1 — output cannot be increased quickly (little spare capacity). The daily catch is limited by the number of boats, crews and fishing quotas, all of which are effectively fixed in the short run. Even if the price of fish rises sharply, fishermen cannot suddenly land much more fish, so the quantity supplied rises only a little → inelastic supply.

Reason 2 — fish is perishable and cannot be stored. Because fresh fish spoils within days, firms cannot hold stocks to release when the price rises. Without inventories to draw on, supply cannot respond quickly to a higher price, reinforcing the low PES.

On a supply diagram this is shown by a steep (near-vertical) supply curve: a large rise in price from P₁ to P₂ brings only a small rise in quantity supplied from Q₁ to Q₂ — confirming inelastic supply.

Price elasticity of supply (PES) measures how responsive quantity supplied is to a change in price (%ΔQs ÷ %ΔP), and the time period is the single most important factor determining it. As firms have more time to adjust their factors of production, supply becomes progressively more elastic.

Momentary period (market period). In the very short run, all factors are fixed — the firm cannot change its factory, its machines or even its workforce immediately. Output is essentially fixed, so a price rise cannot be met by more production. Supply is perfectly or highly inelastic (PES close to 0), shown by a near-vertical supply curve.

Short run. Given a little time, the firm can vary some factors — running overtime, adding shifts, buying more raw materials — while the size of the plant stays fixed. Output can now rise somewhat when price rises, so supply is less inelastic than in the momentary period, but still not fully responsive because capacity is capped.

Long run. Over a longer period all factors become variable: the firm can build new factories, install more capital and recruit and train additional labour. Because it can expand capacity fully, a higher price can be met with a large rise in output, so supply is at its most elastic (higher PES).

Therefore the longer the time period, the more elastic supply becomes, because more factors of production can be adjusted in response to the price change — which is why time is treated as the key determinant of PES.

A subsidy is a payment from the government to producers that lowers their costs and shifts the supply curve to the right (S₁ → S₂). At the new equilibrium the price to consumers falls and the quantity traded rises. The size of that quantity increase, however, depends heavily on the price elasticity of supply (PES).

Analysis (KAA). On a demand and supply diagram, the subsidy shifts supply from S₁ to S₂ (a downward/rightward shift equal to the subsidy per unit). Because short-run supply of solar panels is price inelastic (PES < 1) — production needs specialised factories, skilled labour and imported components that cannot be expanded quickly — the supply curve is steep. When a steep supply curve shifts right, most of the effect shows up as a fall in price with only a small rise in quantity (Q₁ to Q₂). So in the short run the subsidy raises output only modestly, and much of its value is absorbed as a higher effective price received by producers rather than as extra panels.

Evaluation (AO4).

• It depends on the time period. In the long run, supply becomes more elastic — firms can build new factories and train workers — so the same subsidy shifts a flatter supply curve and produces a much larger rise in quantity. The subsidy's effect grows over time.
• It depends on the size of the subsidy and whether it is maintained; a small or temporary subsidy has little effect on capacity decisions.
• Cost and opportunity cost. The subsidy has an opportunity cost for the government, and if the short-run output gain is small it may look poor value initially.
• Other constraints. Output may be limited by supply-chain bottlenecks (e.g. imported components), so even a generous subsidy cannot raise quantity much until those ease.

Judgement. In the short run, because supply is inelastic, the subsidy raises the quantity of solar panels only modestly — its main short-run effect is on price/producer revenue. Its effectiveness in raising output is much greater in the long run, once supply becomes more elastic and capacity can expand. So the extent of the increase is limited initially but grows over time, and the policy is best judged as a long-term measure rather than a quick fix.

Price elasticity of supply (PES) measures how responsive quantity supplied is to a change in price (%ΔQs ÷ %ΔP), and it is more elastic the longer the time period. For a country dependent on exporting a single primary commodity (e.g. coffee, copper or cocoa), the low short-run PES of that commodity is of major importance.

Why low PES matters (KAA). Primary commodities typically have inelastic supply, especially in the short run: crops take a season or more to grow, mines take years to develop, land is fixed, and much output is perishable or relies on specialised resources. On a diagram this is a steep supply curve. Because demand for many staple commodities is also inelastic, any shift in supply — a drought, a good harvest, a mine disruption — causes a large change in price but only a small change in quantity. The result is volatile export prices and unstable export revenues. In a poor harvest, price spikes but there is little extra to sell; in a bumper harvest, price collapses and, because demand is inelastic, total revenue can actually fall. For a country reliant on one commodity, this feeds through to unstable export earnings, government tax revenue and the balance of payments, making planning and investment difficult. The time period matters because in the long run supply becomes more elastic — producers can plant more, open new mines, or diversify — so extreme volatility tends to ease over time, and policy that buys time can help.

Evaluation (AO4).

• It depends on demand elasticity too. Volatility is worst when both PES and PED are low; if the commodity has closer substitutes (more elastic demand), price swings are smaller. So PES alone does not determine the outcome.
• It depends on storability and diversification. If the commodity can be stored (e.g. copper, grain), firms and governments can smooth supply with buffer stocks, reducing the impact of low PES. A country that diversifies its exports is far less exposed, regardless of any single commodity's PES.
• Time period cuts both ways. Because long-run PES is higher, the very producers who plant more when prices are high can over-supply later, deepening the next price crash (a cobweb-type effect). So a longer horizon eases some volatility but can create cycles of its own.
• Policy and world conditions. Global demand growth, exchange rates, and interventions (price support, international agreements) can matter more than PES in the long run; and price-support schemes carry their own risks of government failure and cost.

Judgement. For a single-commodity exporter, low short-run PES is highly important: combined with inelastic demand it is the core reason export prices and incomes are so volatile, which justifies stabilisation measures and, above all, diversification. However, PES is not the whole story — the severity depends on demand elasticity, storability and world conditions, and the time period is central because supply becomes more elastic (and volatility typically eases) in the long run, even as it can generate its own cycles. On balance, understanding PES and the time period is essential for such a country's policy, but it must be combined with the demand side and a long-run strategy of diversification rather than relied on alone.