Price Elasticity of Supply (PES) measures how responsive the quantity supplied of a good or service is to a change in its price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price.

The magnitude of the PES value reflects the degree of responsiveness. An absolute value greater than 1 indicates elastic supply, where quantity supplied changes by a larger percentage than the price change, showing high responsiveness. A value less than 1 indicates inelastic supply, where quantity supplied changes by a smaller percentage than the price, showing low responsiveness. A value of 1 denotes unit elastic supply.

Factors affecting PES:

• Spare capacity: If firms have unused production capacity, supply can increase easily, making PES more elastic.
• Inventory levels: High stock levels allow quick response to price increases without production delays.
• Mobility of factors of production: If resources can be easily shifted to producing the good, supply is more elastic.
• Availability of resources: Readily available inputs facilitate larger supply adjustments.
• Time period: Supply is typically more elastic in the long run as firms can adjust production processes, compared to the short run.

Implications:

When PES is elastic, firms can readily expand or contract output in response to price fluctuations or shifts in demand, enabling them to adapt swiftly to market changes and optimize profitability. In contrast, inelastic PES implies challenges in adjusting supply quickly, potentially causing delays in responding to market dynamics and leading to suboptimal profits or shortages/surpluses.