Definition, Calculation & Determinants of PES (DP IB Economics)

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Last updated

20 September 2024

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

$PES = \frac{% change in quantity supplied}{% change in price} = \frac{% △ in QS}{% △ in P}$
To calculate a % change, use the following formula
$% Change = \frac{new value - old value}{old value} \times 100$

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 [4]

Answer:

Step 1: Calculate the % change in QS

$% △ Q S = \frac{120 - 110}{110} \times 100 % △ Q S = 9.1 %$

Step 2: Calculate the % change in P

$% △ P = \frac{1.45 - 0.90}{0.90} x 100 % △ P = 61 %$

Step 3: Insert the above values in the PES formula

$PE S = \frac{% △ in Q S}{% △ in P} PE S = \frac{9.1 %}{61 %} PE S = 0.15$

(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 Tips and Tricks

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 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 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 supply
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
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)
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
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

Examiner Tips and Tricks

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

PES Factor	Primary Commodities - Inelastic (PES = 0-1)	Manufactured Goods - Elastic (PES = >1)
Mobility of the factors of production	If the price of a specific agricultural commodity increases, it's not for farmers to quickly switch to producing a different crop	There is generally more flexibility to switch production to alternative goods in response to price changes, leading to a higher PES E.g. a car manufacturer may be able to adjust its factors of production from producing family car to sports models relatively easily
The rate at which costs of production (marginal costs) increase	The PES for primary commodities is typically lower The production of primary commodities is often subject to inherent constraints, (e.g. longer production cycles) The cost to produce one more unit of output is relatively high	The PES for manufactured products is typically higher The additional costs of supplying mass produced manufactured products is generally lower as it is easy to add on extra units to production output
The ability to store goods	Perishable agricultural have limited storage capabilities This reduces the short-term supply responsiveness and contributes to a lower PES for primary commodities	Manufactured products can be stored for longer periods without significant deterioration or spoilage This allows firms to respond to price changes by adjusting the quantity supplied from existing stock
Spare production capacity	Output is relatively labour or land intensive which places limits on the amount of spare production capacity leading to a low PES	Output is often generated using machinery and so there is more capacity when producing manufactured products leading to a higher PES
Time period	The time period to grow or extract primary commodities is much longer than that required to manufacture products	Many products are manufactured in a relatively short time period

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