A LevelEconomicsAQARevision NotesIndividuals, Firms, Markets & Market Failure3. Price Determination in Competitive MarketsPrice Elasticity of Supply (PES)

Price Elasticity of Supply (PES) (AQA A Level Economics)

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Lorraine Clancy

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The Definition & Calculation of PES

  • The law of supply states that when there is an increase in price (ceteris paribus), producers will increase the quantity supplied and vice versa
    • Economists are interested by how much the quantity supplied will increase
  • Price elasticity of supply (PES) reveals how responsive the change in quantity supplied is to a change in price
    • The responsiveness is different for different types of products
  • PES can be calculated using the following formula"

begin mathsize 16px style text PES =  end text fraction numerator percent sign space change space in space quantity space supplied over denominator percent sign space change space in space price end fraction space equals space fraction numerator percent sign triangle space in thin space QS over denominator percent sign triangle in space straight P end fraction end style

 

  • To calculate a % change, use the following formula:

percent sign space Change space equals space fraction numerator new space value space minus space old space value over denominator old space value end fraction space cross times space 100 

Worked example

In recent months, the price of avocados has increased from AU$ 0.90 to AU$ 1.45. Bewdley Farm Shop in Margaret River has sought to maximise their profits by increasing the quantity supplied to the market. They have been able to increase sales from 110 units a week to 120 units a week.

Calculate the PES of avocados and explain one reason for the value 

Step 1:  Calculate the % change in QS

     percent sign triangle Q S space equals space fraction numerator 120 minus 110 over denominator 110 end fraction space cross times 100 percent sign triangle Q S space equals space 9.1 percent sign 

Step 2: Calculate the % change in P

   percent sign triangle straight P space equals space fraction numerator 1.45 space minus space 0.90 over denominator 0.90 end fraction space straight x space 100 percent sign triangle straight P space equals space 61 percent sign

Step 3: Insert the above values in the PES formula

   begin mathsize 14px style PE S space equals space fraction numerator percent sign triangle space in thin space Q S over denominator percent sign triangle in space straight P end fraction PE S space equals space fraction numerator 9.1 percent sign over denominator 61 percent sign end fraction PE S space equals space space 0.15 end style

Step 4: Explain one reason for the value

The PES value of 0.15 indicates that avocados are very price inelastic in supply. Even with a significant increase in price, suppliers are unable to supply more due to the time it takes to grow additional avocados 

Worked example

The diagram below shows two market demand curves (D1 and D2) and the market supply curve (S) for Good X

screenshot-2024-04-30-at-09-51-28

(This image is a placeholder - new image in production)

The price elasticity of supply of Good X when the demand curve shifts from D1 to D2 is: 

A +0.25

B +2.0

C +4.0

D +7.5

Step 1: Calculate the % change in QS

   percent sign triangle QS space equals space fraction numerator 180 minus 100 over denominator 100 end fraction space cross times 100 percent sign triangle QS space equals space 80 percent sign

Step 2: Calculate the % change in P

   percent sign triangle straight P space equals space fraction numerator 240 space minus space 200 over denominator 200 end fraction space straight x space 100 percent sign triangle straight P space equals space 20 percent sign

Step 3: Insert the above values into the PES formula

   begin mathsize 16px style PES space equals space fraction numerator percent sign triangle space in thin space QS over denominator percent sign triangle in space straight P end fraction PES space equals space fraction numerator 80 percent sign over denominator 20 percent sign end fraction PES space equals space space 4 end style

The PES value of 4 indicates Good X is elastic in supply. Suppliers are very responsive to a change in price, they are able to increase output easily

Exam Tip

When doing elasticity calculations, make sure that your final answer for PES is not expressed as a percentage. This is a common error and loses marks.

In Paper 3 multiple choice questions, you are occasionally given the PES value and the %Δ in QD. You have to find %Δ in price. Follow the standard math procedure as follows:

1. Substitute the values provided into the equation

2. Substitute X for %Δ in price

3. Solve for X

Interpreting PES Values

The Values of PES vary from 0 to Infinity (∞) & they are Classified as Follows


Value
Name
Explanation
0  Perfectly Inelastic  The QS is completely unresponsive to a
change in P (e.g. fixed number of seats in a theatre)
0→1 Relatively Inelastic The %∆ in QS is less than proportional
to the %∆ in P (e.g agricultural products)
1→ ∞ Relatively Elastic The %∆ in QS is more than proportional
to the %∆ in P (e.g t-shirts)
∞ Perfectly Elastic The %∆ in QS will fall to zero with any %∆ in P. However, supply is unlimited at a particular price. This is a very theoretical scenario

The Factors that Influence Price Elasticity of Supply

  • Some products are more responsive to changes in prices than other products
  • The factors that determine the responsiveness of PES include:
  1. Mobility of the factors of production
    If producers can quickly switch their resources between products, then the PES will be more elastic. E.g. If prices of hiking boots increase and shoe manufacturers can switch resources from producing trainers to boots, then boots will be price elastic in supply

  2. The rate at which costs of production increase
    It costs more to produce each additional unit of output (marginal cost). If the rate of the marginal cost increase is low, the quantity supplied will be more elastic. However, if marginal costs rise quickly, then the quantity supplied will be more inelastic

  3. Ability to store goods
    If products can be easily stored then PES will be higher (elastic) as producers can quickly increase supply (e.g. tinned food products). An inability to store products results in lower PES (inelastic)

  4. Spare capacity
    if prices increase for a product and there is a capacity to produce more in the factories that make those products, then supply will be elastic. If there is no spare capacity to increase production, then supply will be inelastic

  5. Time period
    In the short run, producers may find it harder to respond to an increase in prices as it takes time to produce the product (e.g. avocados). However, in the long run they can change any of their factors of production so as to produce more

Exam Tip

Many students confuse PES with PED and inadvertently answer questions using knowledge from PED. When faced with PES questions, tell yourself to think like a producer (not a consumer!) and it will help you to stay focused on providing the correct answer.

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    Lorraine Clancy

    Author: Lorraine Clancy

    Lorraine brings over 12 years of dedicated teaching experience to the realm of Leaving Cert and IBDP Economics. Having served as the Head of Department in both Dublin and Milan, Lorraine has demonstrated exceptional leadership skills and a commitment to academic excellence. Lorraine has extended her expertise to private tuition, positively impacting students across Ireland. Lorraine stands out for her innovative teaching methods, often incorporating graphic organisers and technology to create dynamic and engaging classroom environments.