Price Elasticity of Supply Calculator

The Price Elasticity of Supply (PES) is a measure used in economics to show how the quantity supplied of a good is influenced by a change in its price. Essentially, it indicates how much the supply of a product changes when its price goes up or down.

Historical Background

The concept of elasticity in economics was introduced by Alfred Marshall in the 19th century. It has since become a fundamental aspect of economic theory, helping to analyze the responsiveness of the quantity supplied or demanded to changes in price.

Calculation Formula

The Price Elasticity of Supply is calculated using the formula:

\[ \text{Price Elasticity of Supply} = \frac{\% \text{ Change in Quantity Supplied}}{\% \text{ Change in Price}} \]

Example Calculation

Suppose a product's original supply is 500 units at a price of $20 each. If the price increases to $25 and the supply expands to 600 units, the calculation would be:

• % Change in Quantity Supplied = \(\frac{600 - 500}{500} \times 100 = 20\%\)
• % Change in Price = \(\frac{25 - 20}{20} \times 100 = 25\%\)
• Price Elasticity of Supply = \(\frac{20\%}{25\%} = 0.8\)

Importance and Usage Scenarios

Understanding the PES is crucial for businesses and policymakers to predict how changes in market prices could affect the supply levels. It is especially important in strategic planning, pricing strategies, and inventory management.

Common FAQs

1. What does a high PES indicate?

   • A high Price Elasticity of Supply indicates that the quantity supplied is very responsive to changes in price. This is typical for goods that are easier to produce or have more flexible production capabilities.

2. Can the PES be negative?

   • No, the Price Elasticity of Supply is usually positive, as the law of supply states that an increase in price typically leads to an increase in the quantity supplied.

3. How does time affect the PES?

   • The elasticity of supply can vary over time. In the short term, the PES might be lower due to production capacity limits. Over the long term, businesses can adjust their production processes, making the supply more elastic.

This calculator streamlines the process of determining the Price Elasticity of Supply, making it more accessible for students, educators, and professionals in the field of economics.