1.2.5 - PES

• PES measures the responsiveness of a change in supply to a change in price.
• PES formula:

  
• If supply is elastic, firms can increase supply quickly at little cost.

  
• Elastic PES:

  • $PES > 1$
  • PES is greater than 1
• Inelastic PES:

  • $PES < 1$
  • PES is less than 1
• If supply is inelastic, an increase in supply will be expensive for firms and take a long time

  
• Factors influencing PES:

  • Time scale
  • Spare capacity
  • Level of stocks
  • How substitutable factors are
  • Barriers to entry to the market
• Higher barriers to entry means supply is more price inelastic, because it is difficult for new firms to enter and supply the market.