Price Elasticity of Supply (PES) (Copy)
2.8 Price Elasticity of Supply (PES)
2.8.1 Definition of PES
- PES = Measures the responsiveness of supply to a change in price.
- Types of elasticity:
- Elastic supply: PES > 1 (producers respond strongly).
- Inelastic supply: PES < 1 (producers respond weakly).
- Unitary elasticity: PES = 1 (proportional response).
- Perfectly inelastic: PES = 0 (supply fixed regardless of price).
- Perfectly elastic: PES = ∞ (supply unlimited at one price).
2.8.2 Calculation of PES
Formula:
PES = (% change in Quantity Supplied) ÷ (% change in Price)
- Always positive (because price and supply move in the same direction).
Examples:
- Price rises 10%, supply rises 20% → PES = 20 ÷ 10 = 2 (Elastic).
- Price rises 20%, supply rises 5% → PES = 5 ÷ 20 = 0.25 (Inelastic).
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course
2.8.3 Determinants of PES
| Determinant | Effect on Elasticity | Example |
|---|---|---|
| Spare capacity | More spare capacity → more elastic | Idle factories increase supply quickly |
| Time period | Longer time → more elastic | Farmers adjust output in long run |
| Availability of inputs | Easy access → more elastic | Textile firms can hire more workers easily |
| Mobility of factors | Easier factor mobility → more elastic | Machines can be shifted between industries |
| Stock levels | High stocks → more elastic | Oil companies releasing reserves |
| Nature of product | Perishable → inelastic, Durable → elastic | Bananas vs steel |
2.8.4 Significance of PES
- Producers:
- If PES is elastic → firms can respond quickly to higher prices → higher profit potential.
- If PES is inelastic → firms cannot increase output quickly → limited revenue gain.
- Consumers:
- Goods with inelastic supply may face sharp price rises if demand increases.
- Example: Housing market → limited land → steep price rises.
- Government:
- Price stability policies depend on PES.
- If supply is inelastic (e.g., food crops), government may subsidise production or maintain buffer stocks.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course
Quick Examples for Exams
- Concert tickets → perfectly inelastic → price rise doesn’t increase seats.
- Cars → relatively elastic → firms increase output with higher prices.
- Agriculture (short run) → inelastic (fixed growing season).
- Manufactured goods (long run) → elastic (factories expand).
Memory Hooks
- Formula: PES = %ΔQ ÷ %ΔP.
- Elastic supply = flexible producers, Inelastic supply = stuck producers.
- Short run → inelastic, Long run → elastic.
- More capacity, stocks, and mobility = higher elasticity.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course