Economics · The allocation of resources. 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 measures how strongly the quantity supplied of a product responds to a change in its price. Price and quantity supplied move in the same direction, so the value is positive.
Supply is elastic when firms can raise output quickly and easily: they have spare capacity, hold stocks of finished goods, can find extra workers and materials, and the product is quick to make. Supply is inelastic when output is hard to change, as with farm crops that take a season or longer to grow, or products that cannot be stored.
Time matters most. Supply is more elastic in the long run, because firms have time to build capacity and hire more factors.
Students mix up the determinants of PES and PED. Substitutes and the share of income belong to demand; for supply, think about how quickly and easily firms can change output.
Answer: PES = 2, so supply is price elastic.
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