When the proportionate change in supply is less than the proportionate change in price. In this case the PES elasticity value will be below 1.
Below is an example of an inelastic supply curve:
The supply curve has the typical upward sloping relationship between price and quantity supplied because the profit incentives that firms face are greater when the price increases. However, with an inelastic supply curve firms ability to raise output in line with a price increase is restricted due to a number of different factors. Which is the main reason why with this type of supply curve the change in the quantity supplied is proportionately less than the price.
These factors are:
1. Amount of Spare Capacity - If a firm has very little spare capacity left, they will not have the sufficient resources to increase output when the price rises.
2. Length of Production Process - If a firm is producing a good that has a long production process their ability to respond to price increases by raising output is restricted as they are unable to raise supply within a short period of time. This is often the case in agricultural markets.
3. Factor Substitutability - A firm will always wish to produce the good that has the highest price, as this is the good that will yield the highest level of profit. However, if firms are unable to transfer their factors of production towards different production processes, this ability to increase output in line with prices is restricted.