1.2.5 Elasticity of supply

• Price elasticity of supply


  The responsiveness of a change in supply to a change in price
• Formula for price elasticity of supply


  Percentage change in quantity supplied divided by Percentage change in price
• Elastic supply


  • Firms can increase supply quickly at little cost
  • Numerical value for PES is >1
• Perfectly inelastic supply


  • PES = 0
  • Supply is fixed, so if there is a change in demand, it cannot be met easily
• Perfectly elastic supply


  • PES = infinity
  • Any quantity demanded can be met without changing price
• Factors influencing PES


  • Time scale
  • Spare capacity
  • Level of stocks
  • How substitutable factors are
  • Barriers to entry to the market
• Short run supply


  More price inelastic, because producers cannot quickly increase supply
• Long run supply


  More price elastic
• Spare resources


  Supply can be increased quickly, for example in a recession there are lots of spare and unemployed resources
• Perishable goods


  Firms cannot stock them for long so supply is more inelastic
• Mobile labour and capital

  Supply is more price elastic because resources can be allocated to where extra supply is needed
• Higher barriers to entry

  Supply is more price inelastic, because it is difficult for new firms to enter and supply the market