Understanding Price Elasticity of Supply

Price elasticity of supply (PES) is the degree of responsiveness of quantity supplied for a good to a change in its own price. In formula, it can be written as: PES = % of change in quantity supplied / % of change in price

The main aim of PES is nothing more than to measure the ability of firms/ producers/ companies to respond to any increase in demand/ price. In some situations, producers can be very responsive and hence high value of PES. This is known as price elastic in supply. On the other hand, the same producers are not responsive and so the value of PES must be low. In more extreme situations, PES can be zero which means perfectly inelastic in supply

What are the determinants of PES?

a. Time period under consideration. If firms are given a very short time frame, perhaps they are unable to respond at all to any increase in demand/ price. The logic is simple. Depending on what industries we are discussing about but all of them are almost unable to produce or give anything in the immediate period. Consider a hobby shop selling some rare collectible figures. All the stocks are shipped from Taiwan, China and Hong Kong to Malaysia. Even if a hardcore collector is willing to pay 3/4/5 times the market price, if the retailers are out of stock they would probably be unable to give anything in the immediate period. This is because the next batch of stocks will probably arrive in the next few months. The same goes for farmers. If they given only one day to grow fresh lemons, bananas and chillies, they are probably unable to provide anything at all since all of them take time to grow. The same goes for new houses. You don't expect a construction firm to complete a condominium/ apartment in one or two days. Of course the ability to supply is zero. But if they are given more time, then they will be able to adjust factors of production for instance buying more raw materials, hire more skilled workers, adjust the size of land and others, then they will become more responsive to market demand and the PES will gradually increase over the time

b. Whether finished stocks can be kept or not. Vegetables and most crops have short shelf lives. They cannot be stored for long. So, let's just say that the market price suddenly increases, there is a possibility that farmers are unable to respond by increasing the market supply. The reason is, there is nothing in the storage! So, how can they be responsive to price increase? If that is the case PES is usually inelastic. On the other hand, coffee beans and oil can be kept. If the market price is good, coffee farmers and oil producing countries can easily flood the market with such output, hence supply becoming more elastic

c. Whether the firm has spare capacity or not. Spare capacity in this case refers to factors of production that are not put to full use such as workers and equipments. If there is unused capacity, then an increase in market price means firms would be able to become more responsive by making all the employees work and machines running. Supply will become price elastic. On the other hand, if the factory is already running to its maximum capacity, no matter how high the price can go, it is not possible to make the workers work any longer or the machines operating further. Think about this. Being a student, if you already have so much homework thrown to you by your lecturer, I am sure that if there is any additional homework given to you, you probably will tell the lecturer that there is no way that you can cope with the volume already. In this case, your supply is price inelastic. This is the case for any industries. As long as production hits bottleneck, there is no way quantity of output can be further increased

d. Factors of production are mobile or not. If workers are occupationally mobile, then supply may become price elastic. In other words, workers must be able to multi-task. If the market price increases, then firms may need more help so that the quantity supplied can be increased. Being able to get some of the workers from other departments to help out is crucial and if not supply will become price inelastic. For instance, the college where I am currently lecturing is said to be price elastic in supply. In case if there is a sudden increase in the number of students who take CIE Economics, lecturers currently teaching Edexcel Economics can be diverted to where they are needed. Likewise, occupational immobility is the main reason why supply of any firms can become price inelastic

e. Number of firms. The greater is the number of firms, the more elastic will be the supply. If the market price for one particular good increases, it will create an incentive for more factories or farmers to start producing it. As such, supply can be greatly increased in the near future

f. Whether the production process is complicated or not. Goods that can be easily produced, fast and do not need to go through many stages of production process will be more responsive to an increase in price. Most manufacturing goods fall under this category. On the other hand, if the production process is lengthy then supply is usually price inelastic such as agricultural produce