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What is Price Elasticity of Supply?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 17 August 2016
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    Conjecture Corporation
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Sometimes referred to simply as PES, price elasticity of supply has to do with how responsive producers are to changes in the prices of goods and services offered. A higher value is indicative of increased sensitivity in that a price increase is likely to generate an increase in the supply available. A lower value serves to indicate that a change in price is likely to have little to no effect on the amount of goods and services produces and made available to consumers. From this perspective, the price elasticity of supply makes it possible to determine how the supply is affected by an upward or a downward price change.

To understand the price elasticity of supply, it is important to consider what happens when a price change takes place with goods that are considered to be essentials rather than luxuries. For example, if the seller of a line of high-quality name brand men’s suits chooses to increase the cost of those suits by 20%, there is a good chance that consumer interest in the products will shift to lesser known brands that are found to be of similar quality, and also happen to be less expensive. Here, the price is considered inelastic, since the change in price does cause the supply to increase as sales for the suits begin to decline.

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At the same time, the price elasticity of supply on goods and services that consumers deem essential may experience very little change in supply as a result of a price increase. A company that produces a well-known line of canned vegetables may choose to increase the cost per can by 10% and see little to not change in the amount of units sold. Here the price elasticity is seen to be higher, as the increase in price had no real effect on consumer buying habits.

Manufacturers pay close attention to price elasticity of supply as a means of determining how much they can charge for various products without adversely affect sales figures and finding themselves with more inventory or supply on hand than is considered equitable. Along with using this approach to gauge pricing, correctly determining the price elasticity of supply is helpful in adjust price quotas to match the projected demand for a product. This means that if a manufacturer finds a way to significantly decrease the cost of production on a given item, and chooses to reduce the unit price to consumers, it is possible to predict the impact this reduction will have on the demand. In turn, the manufacturer can adjust the production rate so an adequate supply is on hand to take advantage of that increased demand.

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