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