Price Elasticity of Supply

Understanding PES

Price Elasticity of Supply measures the responsiveness of quantity supplied of a good to a change in it´s price. It is an indicator of how responsive a firm is to a change in that goods price. 

PES is calculated by: 

% change in Quantity Supplied

% change in Price

Values: 

PES > 1 -  Price Elastic Supply

PES < 1 - Price Inelastic Supply

There are a number of factors that can cause firms to be more or less responsive, such as: 

• Ability to Store the product (Degree of Perishability)

• Time

• Spare Capacity of Production

• Availability of Factors of Production

• Cost to produce 1 additional unit

The video will discuss this in more detail and explain how we show the values of PES with the supply curve. 

Applications of PES

Now that you understand how to interpret the PES values and what determines a goods PES, we need to look at the applications of this. This final video will discuss how understanding the PES for primary commodities (PES<1) v manufactured goods or services (PES>1) can help us understand the impacts for producers of these goods and the overall impacts on economic activity. 

This is particularly important for when we discuss why economies based around primary commodities tend to develop slower than those based around manufacturing.

The final part of the video will also take a look at the big idea statement and apply the concepts of Elasticities to differnet markets to see the various possible outcomes.