Understanding Price Elasticity of Supply (PES) (DP IB Economics)
Revision Note
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
Calculation of PES
PES can be calculated using the following formula
To calculate a % change, use the following formula
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 [4]
Answer:
Step 1: Calculate the % change in QS
Step 2: Calculate the % change in P
Step 3: Insert the above values in the PES formula
(Two marks for the correct answer or 1 mark for any correct working)
Step 4: Explain one reason for the value
The PES value of 0.15 indicates that avocados are very price inelastic in supply [1]. Even with a significant increase in price, suppliers are unable to supply more likely due to the time it takes to grow additional avocados [1]
Examiner 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 2 you are occasionally given the PES value and the %Δ in QD. You are then asked to calculate the %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 |
0→1 | Relatively Inelastic | The %∆ in QS is less than proportional |
1→ ∞ | Relatively Elastic | The %∆ in QS is more than proportional |
∞ | 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 Determinants of 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:
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 supplyThe 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 inelasticAbility 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)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 inelasticTime 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
Examiner 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.
The PES of Primary Commodities & Manufactured Products
The price elasticity of supply (PES) of primary commodities (agricultural products or raw materials) tends to be lower than that of manufactured products (washing machines, phones, cars etc) for several reasons
The best way to explain the reasons for the differences is to apply the factors that determine the price elasticity of supply
A Comparison of the PES of Primary Commodities & Manufactured Products
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Mobility of the factors of production |
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The rate at which costs of production (marginal costs) increase |
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The ability to store goods |
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Spare production capacity |
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Time period |
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