Definition of PES

The Allocation of Resources – Price Elasticity of Supply (PES)

Definition of PES

📈 Price Elasticity of Supply (PES) measures how much the quantity supplied of a good changes in response to a change in its price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price.

🔍 Interpretation:

• PES > 1 – Supply is elastic; producers can quickly increase output when price rises.
• PES < 1 – Supply is inelastic; output changes little even if price changes.
• PES = 1 – Supply is unit elastic; quantity changes proportionally to price.

Analogy: The Faucet of Production

Imagine a faucet that controls how much water (output) flows out.

• 🔧 If the faucet is very responsive (turning the knob a little lets a lot of water out), that’s like a highly elastic supply.
• 🚰 If the faucet barely changes flow no matter how much you turn it, that’s like an inelastic supply.

Practical Example: Pizza Supply

1. Suppose a pizza shop sells 100 pizzas at £10 each.
2. The price rises to £12, and the shop now sells 130 pizzas.
3. Calculate the percentage changes:
   • Price change: $${\displaystyle \frac{12-10}{10} \times 100\% = 20\%}$$
   • Quantity change: $${\displaystyle \frac{130-100}{100} \times 100\% = 30\%}$$
4. Compute PES:
   • $${\displaystyle PES = \frac{30\%}{20\%} = 1.5}$$
5. Interpretation: Since PES > 1, the pizza supply is elastic – the shop can quickly increase production when the price rises.

Key Takeaway

💡 PES tells us how flexible producers are. A higher PES means producers can respond more readily to price changes, which is crucial for understanding market dynamics and resource allocation in the economy.