Price Elasticity of Supply
Economics: IB Diploma, topic 1.2.4
Price Elasticity of Supply
The price elasticity of supply measures how the quantity of supply reacts to a change in price.
Price elasticity of supply
- PES = % change in quantity supplied ÷ % change in price.
- So an elasticity of supply greater than one means that the percentage change in quantity supplied will be greater than a one % price change.
Elastic, inelastic, unit elastic
- Elastic supply, PES > 1.
- So a higher PES value means more elastic supply.
- Inelastic supply, 1 > PES > 0
- So a smaller PES value means more inelastic supply.
- Unit elasticity of supply, PES = 1.
- Percentage change in quantity supplied = percentage change in price.
High elasticity of supply is usually good
- Firms aim for high elasticity of supply so that they can react rapidly to changes in price and demand.
- To increase elasticity, firms can:
- Improve their technology.
- Introduce flexible working patterns.
- Have excess production capacity.
Test yourself on Price Elasticity of Supply
Which of the following has a price elasticity of supply value greater than one?