Key Diagrams - Price Elasticity of Supply

Price elasticity of supply (PES) measures the responsiveness of quantity supplied to a change in price. PES reflects the ability of producers to change the their output following a change in demand and the possible consequences for the marginal cost of supply. When supply is price elastic, producers can respond quickly and easily to changing demand without the need for a rise in market price.

What are the main conditions when supply is price inelastic?

1. Firms operating close to full capacity – for example during an economic boom. A good example was limited manufacturing capacity for PPE
2. Businesses have low levels of stocks – such as when it costs money to keep fresh food refrigerated
3. Trade barriers such as quotas which help to satisfy growing demand
4. Short term constraints of fixed amount of capital and land
5. When the labour market is tight and there are shortages of skilled workers – a good example is the shortage of HGV drivers
6. Length of the growing period – such as for agricultural products
7. Length of planning and testing periods – such as new housing, developing and testing new vaccines