Calculation, Determinants & Significance of PES (Cambridge (CIE) IGCSE Economics)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

The Definition and 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 in 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 Wales have sought to maximise their profits by increasing the quantity supplied to market. They have been able to increase the supply of avocados 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 space 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 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 space 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 unable to supply more likely due to the time it takes to grow additional avocados

Examiner Tips and Tricks

When doing 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

Name

Explanation

 Perfectly inelastic

Value = 0

2-8-1-calculation-determination-and-significance-of-pes---perfectly-inelastic
  •  The QS is completely unresponsive to a change in P

    • E.g. Fixed number of seats in a theatre

Relatively inelastic

Value = 0→1

2-8-1-calculation-determination-and-significance-of-pes---relatively-inelastic
  • The %∆ in QS is less than proportional to the %∆ in P

    • E.g Agricultural products

Relatively elastic

Value = 1 → ∞

2-8-1-calculation-determination-and-significance-of-pes----relatively-elastic


  • The %∆ in QS is more than proportional to the %∆ in P

    • E.g T-shirts

Perfectly elastic

Value = ∞

2-8-1-calculation-determination-and-significance-of-pes---perfectly-elastic
  • The %∆ in QS will fall to zero with any %∆ in P

    • Supply is unlimited at a particular price

    • This is a very theoretical scenario 

Unitary elasticity

Value = 1 

2-8-1-calculation-determination-and-significance-of-pes---unitary-elasticity
  • Any supply curve that starts at the origin

    • E.g. S1, S2 or S3 have a PES value equal to 1

    • The %∆ in P = %∆ in QS

The Determinants of PES

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

  • The factors that determine 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. 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

    • Availability of raw materials
      If raw materials are scarce, then PES will be low (inelastic). If they are abundant, PES will be higher (elastic)

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

    • 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 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 (and not a consumer!) and it will help you to stay focused on providing the correct answer.

The Significance of PES for Stakeholders

  • If producers have a high PES (elastic), then they are able to respond to increases in price very quickly

    • This is desirable as it means producers can increase revenues and profits if they can supply more

    • Firms can increase their PES by:

      • Creating more spare capacity on their production lines

      • Maintaining larger inventories

      • Using more modern technology

  • If producers have a low PES (inelastic) then they are less able to respond to increases in price

    • This shortage in supply will mean that prices continue to rise, possibly causing inflation in the economy

  • Governments are very interested in the PES of key markets in the economy as they want to ensure that these markets can respond quickly to rising demand

    • One example is the housing market

      • If the PES of housing is low (inelastic), property prices will become unaffordable with any increase in demand

    • Another example is the labour market

      • If the PES of labour is low (inelastic) then production costs of firms will rise quickly during periods of increasing demand when firms need to hire additional workers

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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.