definition of price elasticity of supply (PES)
📈 Price Elasticity of Supply (PES)
Definition
The price elasticity of supply measures how much the quantity supplied of a good changes in response to a change in its price. It is always a positive number because higher prices usually encourage producers to supply more.
Formula
$$\varepsilon_s = \frac{\% \Delta Q_s}{\% \Delta P}$$
where $\% \Delta Q_s$ is the percentage change in quantity supplied and $\% \Delta P$ is the percentage change in price.
Interpretation
- Elastic supply ($\varepsilon_s > 1$): Quantity supplied changes by a larger percentage than the price change.
- Unit‑elastic supply ($\varepsilon_s = 1$): Quantity supplied changes by the same percentage as the price.
- Inelastic supply ($\varepsilon_s < 1$): Quantity supplied changes by a smaller percentage than the price.
Analogy & Example
📦 Pizza shop analogy: If the price of pizza rises, the shop can quickly bake more pizzas (elastic supply). If the price of a rare ingredient rises, the shop may not be able to increase production quickly (inelastic supply).
Concrete example: Suppose the price of oranges rises from £1 to £1.20 (a 20% increase). If the quantity supplied rises from 100 to 140 oranges (a 40% increase), then:
$$\varepsilon_s = \frac{40\%}{20\%} = 2$$
The supply is elastic.
Exam Tips
- Always keep the elasticity of supply positive.
- Use the formula and check the sign of the percentage changes.
- Remember: higher price → higher quantity supplied (upward‑sloping supply curve).
- When asked to classify supply, compare the elasticity value to 1.
- For multiple‑choice questions, look for the option that matches the calculated elasticity.
- In short answer, state the definition, give the formula, and interpret the result.
Quick Practice
| Initial Price (£) | New Price (£) | Initial Quantity (units) | New Quantity (units) | PES |
|---|---|---|---|---|
| 2.00 | 2.40 | 150 | 210 | $$\varepsilon_s = \frac{40\%}{20\%} = 2$$ |
Revision
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