Cambridge International as and a level Economics Ebook

Price elasticity of supply (PES):
 
a numerical measure of
 
the responsiveness of the quantity supplied to a change in 
the price of the product.
KEY TERM
Factors influencing PES
Th
e key to understanding PES is supply fl exibility – if 
businesses and industries are more fl exible in the way they 
operate, then supply tends to be more elastic. Th
e main 
infl uences on PES include the following:
■ 
The ease with which businesses can accumulate or reduce 
stocks of goods. Stocks allow companies to meet variations 
in demand through output changes rather than price 
changes – so the more easily manufacturers can do this, 
the higher the PES. Companies that provide services are, 
of course, unable to build up stocks and in most cases, 
the product is ‘perishable’. For example, in the cases of an 
airline or a hotel, if a seat or room is not sold for a particular 
flight or night, revenue is lost.
■ 
The ease with which they can increase production. In the 
short run businesses and industries with spare productive 
capacity will tend to have a higher PES. However, shortages 
of critical factor inputs (skilled workers, components, fuel) 
will oft en lead to an inelastic PES. This is particularly the 
case with agricultural products, where it takes time to alter 
the type of crops produced.
■ 
Over time, of course, companies can increase their 
productive capacity by investing in more capital equipment, 
oft en taking advantage of technological advances. Equally, 
over time, more businesses can enter or leave an industry 
and this will increase the flexibility of supply.
Supply 
curve
% change 
in quantity 
supplied/
/ % change 
in price
=