PES has practical consequences for both firms and policy-makers.
For firms
- A firm with elastic supply can quickly capture price spikes by raising output, boosting both revenue and profit.
- A firm with inelastic supply sees demand and prices rise but cannot fully exploit them; competitors with more flexible production capture the additional sales.
- Firms can deliberately raise their own PES by:
- Keeping spare capacity on production lines.
- Maintaining larger inventories of finished goods.
- Investing in flexible, multi-purpose machinery.
- Using modern technology that allows fast retooling.
For the government
- In a market with inelastic supply and rising demand, prices rise sharply because firms cannot respond. The housing market is a textbook example: if planning rules prevent new building, every rise in demand pushes house prices higher with little extra supply. Long-run inelastic supply is a major cause of housing-affordability problems.
- The labour market behaves similarly. If the supply of skilled workers is inelastic in the short run, firms paying higher wages cannot easily find more workers; wages rise faster than employment and may drive cost-push inflation.
- Governments often try to shift markets toward more elastic supply through training programmes, planning reform and infrastructure investment, especially in housing, energy and skilled labour.