Formula and determinants
How responsive is output?
Price elasticity of supply (PES):
Always positive (law of supply: P↑ → Qs↑).
Ranges:
| Value | Label |
|---|---|
| PES = 0 | Perfectly inelastic (vertical S) |
| 0 < PES < 1 | Inelastic |
| PES = 1 | Unit elastic |
| PES > 1 | Elastic |
| PES = ∞ | Perfectly elastic (horizontal S) |
Determinants of PES:
| Determinant | Effect |
|---|---|
| Spare capacity | If firms have unused capacity, they can ramp up quickly → MORE elastic |
| Stock levels | Goods that can be stored allow quick supply response → MORE elastic |
| Time | Short run: inelastic (fixed factors). Long run: elastic (capacity adjusts) |
| Factor mobility | If labour and capital can switch easily, supply more elastic |
| Production speed | Fast production processes → more elastic |
| Raw materials availability | Constrained inputs → less elastic |
Examples:
- Software downloads — near perfectly elastic (additional units cost almost nothing).
- Premium wine (vintage 2005) — perfectly inelastic (cannot produce more retrospectively).
- Wheat in the short run — inelastic (need a growing season).
- Wheat in the long run — more elastic (farmers plant more next season).
Primary commodities (agriculture, mining) tend to have inelastic short-run supply — long lead times, fixed natural resource constraints. This combined with inelastic demand makes primary commodity markets VOLATILE — small shocks cause large price swings.
Manufactured goods have more elastic supply — firms can adjust shifts, hire temp workers, use stock.
- PES = %ΔQs ÷ %ΔP, always positive.
- Determinants: capacity, stocks, time, factor mobility.
- Primary commodities inelastic SR; manufactured more elastic.