Right, so price elasticity of supply is sometimes referred to as PES. It measures the responsiveness of supply to a change in price. Basically, it indicates the amount a supplier is willing to to provide to a market after a change in price. The aim of a supplier is to maximise profits, so therefore the price elasticity of a supply should always be positive (If the price of a good increase so should supply, and vice versa.)
The formula for PES goes like this:
PES = % Change in quantity supplied ÷ % Change in price
As stated previously, the result will almost always be positive as it's highly unlikely that if price falls then suppliers will supply more of a good to the market. The figures gained from the formula are once again important:
- Greater than 1. If the result is over 1 then it tells us that the goods price elasticity of supply is elastic. So a price rise will lead to a more than responsive rise in supply.
- Between 0 and 1. If the result is between 0 and 1 then the goods price elasticity of supply is inelastic. This means a price rise will lead to a less than responsive rise in supply.
- Exactly 1. If the result is 1 then the goods price elasticity of supply is unitary. A change in price leads to an exactly proportional change in supply.