Micro CHAPTER 2.4:

CHAPTER SUMMARY

Price elasticity of supply measures how much suppliers respond to a change in price. It is the exact same idea as PED. If a small change in price leads to a big change in quantity supplied, then we say the supply is elastic. If a big change in price only leads to a small change in quantity supplied, then we say the supply is inelastic. If the change in price and change in quantity supplied are proportional, then supply is unit elastic.

Just like with demand, we can also have perfectly elastic or perfectly inelastic supply, but these are again extremely rare. Also just like demand, perfectly elastic supply is horizontal. As the supply becomes increasingly inelastic (producers are less responsive to price), the curve becomes more and more vertical.

The calculation of PES is also the same as PED - we simply replace the word "demanded" with the word "supplied."

(% Change in Quantity Supplied) / (% Change in Price).

The one major difference is that PES should be a positive number, because there is a positive relationship between price and quantity supplied. Otherwise, we apply the same rule: >1 = elastic, <1 = inelastic, and exactly 1 = unit elastic.

The main determinant of PES is time and how easy it is to change production - the more difficult or time-consuming it is for a producer to change its production, the more inelastic its supply will be. Businesses that can change the amount they produce very easily are more likely to have price elastic supply.

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