Determinants of PES

We've seen that the supply of a good can be more or less reactive to changes in its price, and the
different values that PES can have.
But, what are the factors that make producers more or less able to respond to changes in the prices
of the goods they sell? What are the factors that make the supply of a good more or less
elastic?

Be Aware
Again, it is important to distinguish between factors that determine the elasticity of supply and factors
that determine supply.

Determinants of supply are factors which make the supply curve shift, while the determinants of
PES determine how sensitive the quantity supplied of a good is to a change in its price.

The time period considered

The time lag between the moment the price of a good changes and the producer's ability to adjust
resources to respond to that price change, is an important factor that affects the value of PES.

Figure 1. Tempting freezing Coke for

a hot day.

When there is a change in price, in the very immediate moment after the change, firms are unable to
increase or decrease very much, since they can't instantly increase or decrease the factors of
production (amount of inputs) that they employ. Therefore, the value of PES will be very inelastic or
even perfectly inelastic (PES = 0).
For example, if the Coca-Cola Company has already planned its production of Diet Coke for January
(winter in the Northern Hemisphere), and there is a sudden unusual heat wave which increases
its demand making the price to increase as well, the supply at the moment of the price increase will
be unchanged.
Even though the firm would have stock, it would still take a couple of days to distribute it to
retailers. Bringing back the diagram that compares different intersecting supply curves from the
previous section (Figure 2), S1 would represent this situation.

Important
The longer the time period considered, the more elastic the supply will be.

Figure 2. Time period considered and

PES.
In a short or medium period of time, firms might be able to increase the quantity of some of the
factors of production and readjust their production plans, having a greater flexibility. This would be
the case represented by S2 on the diagram. However, they might not be able to increase the amount
of machines they have or the size of the factory, which needs a longer period of time.

When the period of time is long, the whole production and factors of production can be increased, so
the value of PES will be much more elastic as represented by S3 on the diagram.

The mobility of factors of production

When a firm is producing a certain product, it uses a specific combination of them, some being more
specialised than others in the production process of that good.
Many times, although the price of another good has increased and would be a good business
opportunity for the firm, it cannot easily shift the resources out of one line of production to another.
The more mobile factors of production can be, the more responsive a firm can be to changes in price
increasing or reducing the quantity supplied to the market, and therefore the greater the PES.

Important
The greater the mobility of factors of production, the more elastic the supply will be.
For example, services as haircuts, housekeeping, and lawn-mowing, would have higher PES than
primary commodities or heavy industrial goods. As the resources needed for haircuts or lawnmowing are not as specialised and costly as those for producing oil, minerals or high-tech
products, firms can easily hire or lay off workers when demand increases or decreases. Therefore,
the supply for these services tends to be more elastic.

The unused capacity

When firms are not using their production resources at its maximum capacity, i.e. they have
unemployed resources or spare room in their factories, they can easily increase the production of
their product without increasing too much of their costs.
This occurs, for example, when machinery is not being used every hour of the day, or workers are
working part-time. In this case, their ability to increase output and respond to an increase in price will
be easier and therefore PES will be greater.
If, on the other hand, the firm is working at full capacity, its machines are on 247, people are
working complete shifts, and there is no room in the factory to include extra equipment, it will be
more difficult and costly to respond to a price increase. Increasing its output by one more unit will
imply needing a whole new factory, therefore PES will be smaller.

Important
The greater the spare (unused) capacity, the more elastic the supply will be.

The ability to store stocks

If a firm has the capacity to store stock, which means keeping inventories of a good in a warehouse,
the supply can be very responsive to a change in price.

Important
The greater the ability to store stock, the more elastic the supply will be.

Figure 3.
Stocked Coca Cola products.
Going back to the Coke example used before, if it is an unusual warm winter, a Coca Cola Company
has stored stock of their Diet Coke, so that it can easily respond to an unexpected increase in
demand, and take advantage of the resulting price increase.
However, once the stock is released to the market and sold, unless they are replaced, the other
determinants of PES become relevant again.

Be Aware

It has to be noted that only non-perishable goods can be stored. So, PES for perishable goods is
usually greater than for non-perishable ones.