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Price elasticity of supply
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Price elasticity of supply
The price elasticity of supply (PES or Es) is commonly known as “a measure used in economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price.” Price elasticity of supply, in application, is the percentage change of the quantity supplied resulting from a 1% change in price. Alternatively, PES is the percentage change in the quantity supplied divided by the percentage change in price.
When PES is less than one, the supply of the good can be described as inelastic. When price elasticity of supply is greater than one, the supply can be described as elastic. An elasticity of zero indicates that quantity supplied does not respond to a price change: the good is "fixed" in supply. Such goods often have no labor component or are not produced, limiting the short run prospects of expansion. If the elasticity is exactly one, the good is said to be unit-elastic. Differing from price elasticity of demand, price elasticities of supply are generally positive numbers because an increase in the price of a good motivates producers to produce more, as relative marginal revenue increases.
The quantity of goods supplied can, in the short term, be different from the amount produced, as manufacturers will have stocks which they can build up or run down.
The slope of a supply curve relates changes in price to changes in quantity supplied. A steeper curve means that price changes are correlated with relatively small quantity changes. Steep supply curves derive that the quantity supplied by producers are not particularly sensitive to price changes. Oppositely, flatter supply curves imply that price changes are associated with large quantity changes. Markets with flat supply curves will see large movements in quantity supplied as prices change.
The concept of elasticity expresses the responsiveness of a value to changes in another (particularly, responsiveness of quantities to prices). An elasticity is the ratio of the percentage change in one value to the percentage change in another. The concept of elasticity applies to demand and supply curves and agents like producers and consumers.
Suppose that there is an increase in demand for apartments. There will be a shortage of apartments at the old level of apartment rents and pressure on rents (price) to increase. Ceteris paribus, the more responsive (elastic) the quantity of apartments supplied is to changes in monthly rents, the lower the increase in rent required to eliminate the shortage and to bring the market back to equilibrium. Conversely, if quantity supplied is less responsive (inelastic) to price changes, price will have to increase more to eliminate a shortage caused by an increase in demand.
The elasticity of supply will generally vary along the curve, even if supply is linear so the slope is constant. This is because the slope measures the absolute increase in quantity for an absolute increase in price, but the elasticity measures the percentage change. This also means that the slope depends on the units of measurement and will change if the units change (e.g., dollars per pound versus dollars per ounce) while the elasticity is a simple number, independent of the units (e.g., 1.2). This is a major advantage of elasticities.
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Price elasticity of supply
The price elasticity of supply (PES or Es) is commonly known as “a measure used in economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price.” Price elasticity of supply, in application, is the percentage change of the quantity supplied resulting from a 1% change in price. Alternatively, PES is the percentage change in the quantity supplied divided by the percentage change in price.
When PES is less than one, the supply of the good can be described as inelastic. When price elasticity of supply is greater than one, the supply can be described as elastic. An elasticity of zero indicates that quantity supplied does not respond to a price change: the good is "fixed" in supply. Such goods often have no labor component or are not produced, limiting the short run prospects of expansion. If the elasticity is exactly one, the good is said to be unit-elastic. Differing from price elasticity of demand, price elasticities of supply are generally positive numbers because an increase in the price of a good motivates producers to produce more, as relative marginal revenue increases.
The quantity of goods supplied can, in the short term, be different from the amount produced, as manufacturers will have stocks which they can build up or run down.
The slope of a supply curve relates changes in price to changes in quantity supplied. A steeper curve means that price changes are correlated with relatively small quantity changes. Steep supply curves derive that the quantity supplied by producers are not particularly sensitive to price changes. Oppositely, flatter supply curves imply that price changes are associated with large quantity changes. Markets with flat supply curves will see large movements in quantity supplied as prices change.
The concept of elasticity expresses the responsiveness of a value to changes in another (particularly, responsiveness of quantities to prices). An elasticity is the ratio of the percentage change in one value to the percentage change in another. The concept of elasticity applies to demand and supply curves and agents like producers and consumers.
Suppose that there is an increase in demand for apartments. There will be a shortage of apartments at the old level of apartment rents and pressure on rents (price) to increase. Ceteris paribus, the more responsive (elastic) the quantity of apartments supplied is to changes in monthly rents, the lower the increase in rent required to eliminate the shortage and to bring the market back to equilibrium. Conversely, if quantity supplied is less responsive (inelastic) to price changes, price will have to increase more to eliminate a shortage caused by an increase in demand.
The elasticity of supply will generally vary along the curve, even if supply is linear so the slope is constant. This is because the slope measures the absolute increase in quantity for an absolute increase in price, but the elasticity measures the percentage change. This also means that the slope depends on the units of measurement and will change if the units change (e.g., dollars per pound versus dollars per ounce) while the elasticity is a simple number, independent of the units (e.g., 1.2). This is a major advantage of elasticities.
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