The Significance of PES (Edexcel IGCSE Economics)

Determinants of PES

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

• The factors that determine the responsiveness of PES include:

1. 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

2. 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)

3. 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

4. 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

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

The Significance of PES for Stakeholders

• If producers have a high PES (elastic) then they are able to respond to increases in price (e.g. due to a new indirect tax) 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 will 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