Economics AS · The price system and the microeconomy. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
Price elasticity of supply (PES) measures how strongly the quantity supplied responds to a change in the good's price. Supply curves slope upwards, so PES is positive. Above 1 means supply is elastic: firms can raise output easily. Below 1 means supply is inelastic: output is hard to change.
PES depends on how quickly and cheaply firms can produce more. Spare capacity, stocks of finished goods, a short production time and resources that can be switched between uses all make supply more elastic. Time matters most: supply is more elastic in the long run than in the short run.
When supply is inelastic, a rise in demand mainly raises the price. When supply is elastic, it mainly raises the quantity.
Students judge PES of a straight-line supply curve by its steepness. What matters is where the line starts: any straight line through the origin has PES = 1.
Answer: PES = 0.6, so supply is price inelastic.
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