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.

Such goods often have no labor component or are not produced, limiting the short run prospects of expansion.

[2] 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 concept of elasticity applies to demand and supply curves and agents like producers and consumers.

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.

Thus, a supply curve with steeper slope (bigger dP/dQ and thus smaller dQ/dP) is less elastic, for given P and Q.

Another special feature of the linear supply curve arises because its elasticity can also be written as bP/(a + bP), which is less than 1 if a < 0 and greater than 1 if a > 0.

At low levels of quantity supplied, firms typically have substantial capacity available for use, so small increases in price make it profitable for firms to begin to use this idle capacity.

However, as capacity becomes fully utilised, increasing production requires additional investment in capital (for example, plant and equipment).

Since the price must rise substantially to cover this additional expense, supply becomes less elastic at high levels of output.