Price Elasticity of Supply and Its Impact on Market Balance

Price elasticity of supply (PES) is an important concept that helps us understand how businesses react to changes in prices. It shows how quickly and effectively producers can increase or decrease their output when prices change.

1. What is Price Elasticity of Supply?

PES measures how much the amount of a product that suppliers offer changes when the price changes. It can be calculated with this formula:

$PES = \frac{\% \text{ Change in Quantity Supplied}}{\% \text{ Change in Price}}$

2. How Does It Affect Market Balance?

• Inelastic Supply (PES < 1): When PES is less than 1, it means that producers don’t change how much they supply very much when prices go up or down. This can cause big changes in prices and possible shortages when demand is high.

• Elastic Supply (PES > 1): When PES is greater than 1, producers can quickly change their output when prices change. This helps keep prices stable and brings the market back to balance more quickly.

3. Effects of Price Changes

In markets where the supply is highly elastic (high PES), a small increase in price can lead to a much larger increase in the amount supplied. For example, if prices go up by 10%, suppliers might increase their output by 15%. This helps stabilize the balance between supply and demand in the market.