Price Elasticity of Supply Formula
PES = (% change in quantity supplied) / (% change in price).
Measure how responsive producers are to price changes.
Includes elastic vs inelastic examples.
The Formula
Price Elasticity of Supply (PES) measures how much the quantity supplied changes in response to a price change. It is always positive (supply curves slope upward) — higher prices lead to more supply.
PES > 1: Elastic supply. Quantity supplied is very responsive to price (manufacturers can quickly ramp up production). Common in industries with flexible production capacity.
PES < 1: Inelastic supply. Quantity supplied responds little to price. Common when production capacity is fixed, inputs are scarce, or production takes a long time (agriculture, oil wells).
PES = 0: Perfectly inelastic (supply is fixed regardless of price). Example: land in a specific location.
PES = ∞: Perfectly elastic (any price drop to zero eliminates supply; any price rise brings unlimited supply). Approximated by industries with constant returns to scale.
Time horizon matters enormously. Short-run supply is almost always more inelastic than long-run supply. A sudden oil price rise brings little new supply in months but triggers major new investment over years.
Factors affecting PES: availability of inputs, production lead time, spare capacity, storability of the good, geographic mobility of producers.
Variables
| Symbol | Meaning | Unit |
|---|---|---|
| PES | Price elasticity of supply | Dimensionless |
| ΔQ/Q | Percentage change in quantity supplied | % |
| ΔP/P | Percentage change in price | % |
Example 1
Price rises 20% and a factory increases output from 500 to 600 units.
%ΔQ = (600−500)/500 = 20%; %ΔP = 20%
PES = 20%/20% = 1.0 (unit elastic supply)
Example 2
Oil price rises 50% but production only increases 5% (constrained by well capacity).
PES = 5% / 50%
PES = 0.1 (very inelastic — typical short-run oil supply)
When to Use It
- Predicting how markets respond to demand shocks
- Analyzing tax incidence (who bears the burden of a sales tax)
- Agricultural price support and commodity market analysis
- Supply chain and procurement planning
Key Notes
- Formula: PES = (% ΔQ_s) / (% ΔP) = (ΔQ/Q) / (ΔP/P): Measures how responsive quantity supplied is to price changes. PES is always ≥ 0 (unlike demand elasticity, supply generally increases with price). PES > 1: elastic; PES < 1: inelastic; PES = 1: unit elastic.
- Time horizon is the key determinant: Supply is almost always more elastic in the long run than the short run. A sudden oil price rise barely changes short-run supply (wells and refineries can't be built overnight), but over years, new production capacity responds. Short-run PES ≈ 0.1–0.3; long-run PES can exceed 1.0 for many commodities.
- Other determinants of PES: Spare capacity (plants running below maximum → elastic); input availability (scarce raw materials → inelastic); production flexibility (easy to switch inputs → elastic); durability (storable goods → supply can shift intertemporally, raising short-run PES).
- Tax incidence shares: The relative inelasticity of supply vs demand determines who bears a tax burden. If supply is more inelastic than demand, suppliers absorb more of the tax. Agricultural crops (fixed-season supply) often show inelastic supply, so producers bear more of crop taxes.
- Applications: PES analysis is used in agricultural policy (price supports and their effects), energy market modeling, housing policy (why rent control causes shortages — supply is inelastic to price caps), and evaluating the speed of market adjustment to demand shocks.