The price elasticity of supply (PES) for a good or service is a numerical value which shows us the relationship between the quantity supplied of a product and a change in its price.
Through calculating PES, we can see how responsive the quantity supplied for a good or service is to a change in price. We assume, given the law of supply, that an increase in price will lead to an increase in quantity supplied. Through knowing the value of PES, we can see exactly how much quantity supplied will increase.
If, following a change in price, the quantity supplied changes more than proportionately (PES > 1), the product is said to be price elastic. On the contrary, if the quantity supplied changes less than proportionately (PES < 1) it is said to be price inelastic.
PES is calculated using this formula:
% ∆ Quantity Supplied / % ∆ Price
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Perfectly elastic supply – the quantity supplied of a good or service changes infinitely at a fixed price level. If price was to either increase or decrease, quantity supplied would drop to zero.
Perfectly inelastic supply – the quantity supplied of a good or service remains fixed at all times, even if there is a change in price.