What is PES?
PES is a measure of responsiveness of quantity supplied of an item with regards to a change in its price.
PES<1: the item has inelastic supply. That means supply is not responsive to price change. When there is a given change in price, the quantity supplied moves LESS than proportionate. This might be due to a few reasons:
- production time period is long: for items with long production time like agriculture goods, the supply is inelastic because even if the price of items go up, farmers are unable to produce more in the short run because it takes a long time to grow the items. hence, supply is unresponsive to price changes.
- amount of spare capacity: whether a firm has spare/idle/remaining resources to increase production. For agriculture items, spare capacity is usually low. Farmers are unlikely to have extra/spare land to produce more items in the short run even if prices go up. Hence, supply is unlikely to respond to price changes.
- mobility of factors of production: this refers to how easily factors of production can be moved from one place to another. agricultural goods have immobile factors, for example land cannot be moved from one place to another.
- whether the item can be stored: agriculture items are perishables. they cannot be stored for long period, so farmers do not have excess stock which can be supplied if price goes up for example.
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