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Price Elasticity of Supply (PES) (Edexcel IGCSE Economics)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

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

  • 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 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 

Step 1:  Calculate the % change in QS

     begin mathsize 14px style 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 end style 

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 

Interpreting PES Values

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

Value and Name

Explanation

Diagram

0

Perfectly Inelastic

  • The QS is completely unresponsive to a change in P (e.g. fixed number of seats in a theatre)

2-8-1-calculation-determination-and-significance-of-pes---perfectly-inelastic

0 → 1

Relatively Inelastic

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

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

 

1 → ∞

Relatively Elastic

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

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

 

∞

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 

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

 

1

Unitary Elasticity

  • Any supply curve that starts at the origin (e.g. S1, S2 or S3) has a PES value equal to 1. The %∆ in P = %∆ in QS

2-8-1-calculation-determination-and-significance-of-pes---unitary-elasticity

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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.