Lesson preview · Price Elasticity Of Supply
Determinants of PES
~8 min · Free to read
Why can some industries scale up instantly while others take years? PES varies dramatically across industries — from near-zero for fine art to very high for software. Four factors determine the difference.
Key Term
The 4 Determinants of PES
- Time horizon — longer time → more elastic
- Spare capacity — more unused capacity → more elastic
- Mobility of factors of production — easier to reassign workers/machines → more elastic
- Inventory (stocks) — more stock on hand → more elastic
1. Time horizon. In the short run, a firm is stuck with its current factory, equipment, and workforce — hard to expand. In the long run, it can build new factories, hire workers, invest in equipment. Long run = more elastic supply.
2. Spare capacity. A factory at 50% capacity can double output fast — elastic. A factory at 99% capacity needs new machines, workers, and space to grow — inelastic.
3. Mobility of factors of production. Can labor and capital move easily into this industry? General skills and standard equipment → high mobility → elastic. Specialized skills and custom equipment → low mobility → inelastic. A t-shirt factory hires and trains workers quickly; a neurosurgeon practice cannot.
4. Inventory (stocks). Warehouses full of stock let producers meet sudden demand instantly — elastic. Perishable or custom-made products with no inventory → inelastic. Canned beans vs fresh seafood — guess which is more elastic.
Tip
Quick heuristic
Ask: ‘How fast can this industry add another unit of output?’ • Bakery → minutes (elastic) • Software → instant copy (very elastic) • Oil well → years (inelastic) • Original artwork by a dead painter → impossible (perfectly inelastic)
Check yourself · no marks
Why is the supply of oil more inelastic in the short run than the long run?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Worked Example
Two industries facing a 10% price increase:
A. Fresh salmon. Price rises from 15 dollars/lb to 18 dollars/lb. Supply rises only from 2,000 to 2,100 lbs/week. B. Cloud computing. Server time rises 10%; supply rises from 1M hours to 1.3M hours.
Compute and contrast PES for each.
Practice · 1 / 5
Which factor makes supply MORE elastic?
Next
Like what you read?
Sign up free to save your progress, get spaced reviews tuned to you, and unlock all 50 microeconomics knowledge points with interactive graphs and adaptive practice.