Economics Online

 Main stories Energy market - to be investigated by new competition watchdog..more Budget analysis - latest news Bank of England - downgrades unemployment threshold UK growth - GDP up 0.8% in the third quarter of 2013 UK unemployment - down to 7.1% as jobs market improves. More.. The global economy - IMF revises growth forecasts..More Royal Mail - privatisation comes a step closer with announcement of IPO. More... UK to launch Islamic Bond ..more Mortgage approvals - highest since Jan 2009...More Bank of England launches 'forward guidance' policy. Read the full story. The UK's top 40 Universities for Economics. Public spending - £11.5bn cuts announced UK growth - UK avoids triple-dip recession Benefit cap  - kicks in at £500 per week UK Budget 2013 - analysis and comment Student Guide to university Clearing Quantitative easing - put on hold Poverty - recession and relative poverty Welfare reform - the end of universal benefits Underemployment - over 3 million CPI inflation - at 2.7% Energy prices - set to rise Competition policy - new regulator planned Greek bailout - Euro problems Top international universities for Economics Top UK universities for Economics OECD - latest forecasts for the OECD countries..More Updates Get the latest updates on the UK economy, including GDP, inflation...More... Study guides Latest resources for students from Economics Online. How to answer data response questions. More... Multiple choice tests Improve knowledge and understanding of Economics. Market structures revision presentations Economics tuition - from specialist tutors. Find out more..or REGISTER The financial crisis reveals a fundamental weakness .. Recommended texts

PED

XED

YED

# Price elasticity of supply

Price elasticity of supply (PES) measures the responsiveness of quantity supplied to a change in price. It is necessary for a firm to know how quickly, and effectively, it can respond to changing market conditions, especially to price changes. The following equation can be used to calculate PES.

While the coefficient for PES is positive in value, it may range from 0, perfectly inelastic, to infinite, perfectly elastic.

Consider the following example:

A firm’s market price increases from £1 to £1.10, and its supply increases from 10m to 12.5m. PES is:

+25 +10

= (+) 2.5

The positive sign reflects the fact that higher prices will act an incentive to supply more. Because the coefficient is greater than one, PES is elastic and the firm is responsive to changes in price. This will give it a competitive advantage over its rivals.

Video

## Extreme cases

There are three extreme cases of PES.

1. Perfectly elastic, where supply is infinite at any one price.

2. Perfectly inelastic, where only one quantity can be supplied.

3. Unit elasticity, which graphically is shown as a linear supply curve coming from the origin.

## Determinants of PES

How firms respond to changes in market conditions, especially price, is an important consideration for the firm itself, and to an understanding of how markets work.

The key considerations are:

1. Are resource inputs readily available?

2. Are factors mobile - are workers prepared to move to where they are needed?

3. Can finished products be easily stored, and are there existing stocks?

4. Is production running at full capacity?

5. How long and complex is the production cycle or production process?

What is the most desirable PES for a firm?

It is desirable for a firm to be highly responsive to changes in price and other market conditions. This is because a high PES makes the firm more competitive than its rivals and it allows the firm to generate more revenue and profits.

## Improving PES

Because a high PES is desirable, it may be necessary for firms to undertake actions that improve their speed of response to changes in market conditions. Examples of these actions include:

1. Creating spare capacity

2. Using the latest technology

3. Keeping sufficient stocks

4. Developing better storage systems

5. Prolonging the shelf life of products

6. Developing better distribution systems

7. Providing training for workers

8. Having flexible workers who can do a range of jobs

9. Locating production near to the market

10. Allowing inward migration of labour if there is a labour shortage