Price elasticity of supply


The price elasticity of supply is 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.
The elasticity is represented in numerical form, and is defined as the percentage change in the quantity supplied divided by the percentage change in price.
When the elasticity is less than one, the supply of the good can be described as inelastic; when it 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.
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.

Factors

;Availability of raw materials: For example, availability may cap the amount of gold that can be produced in a country regardless of price. Likewise, the price of Van Gogh paintings is unlikely to affect their supply.
;Length and complexity of production: Much depends on the complexity of the production process. Textile production is relatively simple. The labour is largely unskilled and production facilities are little more than buildings – no special structures are needed. Thus the PES for textiles is elastic. On the other hand, the PES for specific types of motor vehicles is relatively inelastic. Auto manufacture is a multi-stage process that requires specialized equipment, skilled labour, a large suppliers network and large R&D costs.
;Mobility of factors: If the factors of production are easily available and if a producer producing one good can switch their resources and put it towards the creation of a product in demand, then it can be said that the PES is relatively elastic. The inverse applies to this, to make it relatively inelastic.
;Time to respond: The more time a producer has to respond to price changes the more elastic the supply. Supply is normally more elastic in the long run than in the short run for produced goods, since it is generally assumed that in the long run all factors of production can be utilised to increase supply, whereas in the short run only labor can be increased, and even then, changes may be prohibitively costly. For example, a cotton farmer cannot immediately respond to an increase in the price of soybeans because of the time it would take to procure the necessary land.
;Inventories: A producer who has a supply of goods or available storage capacity can quickly increase supply to market.
;Spare or excess production capacity: A producer who has unused capacity can quickly respond to price changes in his market assuming that variable factors are readily available. The existence of spare capacity within a firm, would be indicative of more proportionate response in quantity supplied to changes in price. It indicates that the producer would be able to utilise spare factor markets at its disposal and hence respond to changes in demand to match with supply. The greater the extent of spare production capacity, the quicker suppliers can respond to price changes and hence the more price elastic the good/service would be.
Various research methods are used to calculate price elasticities in real life, including analysis of historic sales data, both public and private, and use of present-day surveys of customers' preferences to build up test markets capable of modelling elasticity such changes. Alternatively, conjoint analysis may be used.

Elasticity versus slope

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 while the elasticity is a simple number, independent of the units. This is a major advantage of elasticities.
The slope of the supply curve is dP/dQ, while the elasticity is . Thus, a supply curve with steeper slope is less elastic, for given P and Q. Along a linear supply curve such as Q = a + b P the slope is constant but the elasticity is b, so the elasticity rises with greater P both from the direct effect and the increase in Q.
Another special feature of the linear supply curve arises because its elasticity can also be written as bP/, which is less than 1 if a < 0 and greater than 1 if a > 0. Linear supply curves which cut through the positive part of the price axis and have zero quantity supplied if the price is too low have a < 0 and hence they always have elastic supply. Curves which cut through the positive part of the quantity axis and have positive quantity supplied even if the price is zero have a > 0 and hence always have inelastic supply. Curves which go through the origin have a = 0 and hence have an elasticity of 1.

Short run and long run

Supply is more elastic in the long run than in the short run, for two reasons. First, for each individual firm the long run is defined as a length of time such that the usages of all factors of production, even those such as physical capital, can be varied. So for example, if the price of a good goes up, in the long run the usages of both labor and capital can be increased, leading to more of an increase in output supplied than if, as in the short run, only labor usage can be increased.
Second, from the perspective of the industry as a whole, a sustained rise in the market-determined selling price will eventually—in the long run—lead to entry of more firms into the industry, increasing the supply by more than will occur in the absence of such entry.

Selected supply elasticities