Price Elasticity of Supply (PES) | O Level Economics 2281 & IGCSE Economics 0455 | Detailed Free Notes To Score An A Star (A*)

2.8.1 Definition of PES

• Price Elasticity of Supply (PES) measures the responsiveness of quantity supplied of a good to a change in its price.
• Formula basis: % change in quantity supplied / % change in price
• PES is generally positive, unlike PED, because price and supply typically move in the same direction.

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2.8.2 Calculation of PES

• PES formula:
  PES = (% change in quantity supplied) / (% change in price)
• Percentage change formula:
  % change = (New value – Original value) / Original value × 100
• Interpretation of PES values:
  • PES > 1: Supply is price elastic.
  • PES < 1: Supply is price inelastic.
  • PES = 1: Unitary elasticity of supply.
  • PES = 0: Perfectly inelastic (supply cannot respond).
  • PES = ∞: Perfectly elastic (any quantity can be supplied at a given price).

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2.8.3 Determinants of PES

1. Time Period:
   • Short run: Supply is usually inelastic.
   • Long run: Supply becomes more elastic as firms can increase production capacity.
2. Availability of Factors of Production:
   • If land, labour, and capital are easily available, supply is more elastic.
3. Mobility of Factors of Production:
   • The easier it is to shift resources between products or industries, the more elastic the supply.
4. Spare Capacity:
   • If firms have unused capacity, they can quickly respond to price increases → elastic supply.
5. Ability to Store Stock:
   • Perishable goods (e.g., fruits) → inelastic supply.
   • Durable goods (e.g., electronics) → elastic supply.
6. Production Time:
   • Short production cycles (e.g., bakery items) = more elastic.
   • Long production cycles (e.g., construction) = inelastic.
7. Level of Stock or Inventory:
   • High stock levels → easier to meet rising demand → more elastic supply.

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2.8.4 Significance of PES

For Producers:

• Pricing Strategy:
  • If PES is elastic, a price rise will lead to a large increase in quantity supplied and potential revenue.
• Production Planning:
  • Helps businesses understand how fast they can ramp up production in response to market changes.

For Consumers:

• Affects price stability:
  • If PES is inelastic, sudden demand increases lead to sharp price hikes.
  • If PES is elastic, supply adjusts and prevents steep price rises.

For Government:

• Helps in designing effective tax or subsidy policies:
  • If PES is inelastic, taxes may have little effect on supply volume.
• Useful for planning emergency supply strategies, especially for essential goods.
• Crucial for price control policies (e.g., minimum price or buffer stocks).

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Diagrammatic Analysis of PES

• Elastic Supply Curve:
  • Flatter slope.
  • Small price increase → large increase in quantity supplied.
• Inelastic Supply Curve:
  • Steeper slope.
  • Large price increase → small increase in quantity supplied.
• Perfectly Inelastic:
  • Vertical line (quantity doesn’t change regardless of price).
• Perfectly Elastic:
  • Horizontal line (any quantity supplied at a constant price).

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Real-Life Examples

Product	Likely PES	Reason
Agricultural crops	<1	Fixed planting season, slow production cycle
Manufactured goods	>1	Quick production, available inputs
Housing	<1	Time-consuming to build
Bread from a bakery	>1	Fast production, easily scaled
Electricity supply	<1	Infrastructure-dependent

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Case Study Example

• A firm supplies 500 units at $20. After the price increases to $24, they supply 600 units:
  • % change in quantity = (600 – 500)/500 × 100 = 20%
  • % change in price = (24 – 20)/20 × 100 = 20%
  • PES = 20% / 20% = 1 → Unitary elasticity of supply

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Implications for Market Behavior

• In elastic supply:
  • Markets are more responsive → less price volatility.
  • Producers can take advantage of price spikes quickly.
• In inelastic supply:
  • Markets face supply bottlenecks.
  • Prices can rise rapidly in case of demand surges (e.g., real estate, oil).

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Key Exam Tips

• Always mention whether PES is elastic, inelastic, or unitary based on value.
• Use diagrams to visually represent elasticity conditions.
• Link determinants to real-world examples.
• Consider short-run vs. long-run impacts in explanations.
• Highlight policy or business implications when discussing significance.