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A LevelEconomicsEdexcelEconomics ARevision Notes1. Introduction to Markets and Market Failure1.2 How Markets WorkElasticity of Supply

Elasticity of Supply (Edexcel A Level Economics A)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

Price Elasticity of Supply (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

Calculation of PES

  • PES can be calculated using the following formula

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

 

  • 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 £0.90 to £1.45. Bewdley Farm Shop in the Severn valley have sought to maximise their profits by increasing the quantity supplied to 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 plus 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 plus 61 percent sign

Step 3: Insert the above values in the PES formula

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 plus 0.15

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 less able to supply more due to the time it takes to grow additional avocados

Examiner Tips and Tricks

All PES values are positive, reflecting the relationship between price and quantity on the supply curve. It is a measure of the extent to which the quantity supplied moves along the supply curve after a price change

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

Interpreting PES values

The Values of PES Vary From 0 to Infinity (∞) and They Are Classified As Follows

Value

Name

Explanation

0

 Perfectly Price Inelastic

 The QS is completely unresponsive to a
change in P (e.g. fixed number of seats in a theatre) so the supply curve is vertical

0→1

Relatively Price Inelastic

The %∆ in QS is less than proportional
to the %∆ in P (e.g agricultural products)

1→ ∞

Relatively Price Elastic

The %∆ in QS is more than proportional
to the %∆ in P (e.g t-shirts)

∞

Perfectly Price 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 but is evident when examining international trade diagrams. The supply curve is horizontal 

Factors that influence the PES

  • Some products are more responsive to changes in prices than other products

  • The factors that determine the responsiveness are called the determinants of PES and include:

  1. Mobility of the factors of production: if producers can quickly switch their resources between products, then the PES will be more price elastic. For example, 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. Availability of raw materials: if raw materials are scarce, then PES will be low (price inelastic). If they are abundant, PES will be higher (price elastic)

  3. Ability to store goods: if products can be easily stored, then PES will be higher (price elastic) as producers can quickly increase supply (for example, tinned food products). An inability to store products results in lower PES (price inelastic)

  4. Spare capacity: if prices increase for a product and there is capacity to produce more in the factories that make those products, then supply will be price elastic. If there is no spare capacity to increase production, then supply will be price 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, producers can change any of their factors of production so can produce more

Examiner Tips and Tricks

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

Distinction Between Short-run & Long-run

  • The resources used in production are called factors of production

  • All four factors of production are required to produce any good/service

    • Land: non man-made resources used in production (e.g. coal)

    • Capital: man-made resources used in production (e.g. MRI machine or fertiliser)

    • Labour: workers involved in the production process

    • Entrepreneurship: the individual(s) involved in organising the other factors of production

  • Economists differentiate between the short-run and the long-run periods of production and these definitions relate to the factors of production. It is not a physical period of time

    • Short-run is any period of time in which at least one factor of production is fixed and this is a limiting factor. For example, Lego may be able to vary all factors of production in the short-run, except for the number of factories (capital) that they have

    • Long-run is any period of time in which all the factors of production are variable (it is also called the planning stage). Producers are able to vary all of their resources to respond to changing market conditions. For example, Lego could build a new factory to take advantage of higher prices or greater demand

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    Author
    Reviewer
    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

    Jenna Quinn

    Author: Jenna Quinn

    Expertise: Head of New Subjects

    Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.