Price Elasticity of Supply and Its Determinants
Price elasticity of supply (PES) measures the responsiveness of quantity supplied of a good to a change in its own price, calculated as PES = percentage change in quantity supplied / percentage change in price.
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Method
- State the PES formula and calculate percentage changes for both quantity supplied and price before dividing.
- Interpret the sign: PES is normally positive because price and quantity supplied normally move in the same direction along an upward-sloping supply curve.
- Interpret the size against the elastic/inelastic boundary of 1, and identify the two extreme cases on a diagram: perfectly inelastic supply, a vertical line, PES = 0, and perfectly elastic supply, a horizontal line, PES = infinite.
- Learn the determinants of PES: the time period allowed for producers to respond, the amount of spare production capacity a firm currently has, the ease and cost of storing the product, and how mobile factors of production are between uses.
- Explain why supply of agricultural goods and other goods with a long production period tends to be price inelastic in the short run, since output cannot be increased quickly once the growing season or production cycle has started.
- Apply PES to the impact of a demand shock: if PES is low, an increase in demand causes a relatively larger increase in price and a smaller increase in quantity supplied; if PES is high, the same demand increase causes a larger increase in quantity and a smaller price rise.
- When calculating from data, always compute the two percentage changes as (change / original value) x 100 before dividing, exactly as for PED.
Worked example
The price of a good rises from 20 pounds to 25 pounds, and the quantity firms are willing to supply rises from 1,000 to 1,150 units. Calculate the price elasticity of supply and state whether supply is elastic or inelastic, with a reason.
- Calculate the percentage change in quantity supplied: (1,150 - 1,000) / 1,000 x 100 = 150/1,000 x 100 = 15%.
- Calculate the percentage change in price: (25 - 20) / 20 x 100 = 5/20 x 100 = 25%.
- Calculate PES: PES = percentage change in quantity supplied / percentage change in price = 15% / 25% = 0.6.
- Interpret the sign: PES is positive, as expected, since price and quantity supplied moved in the same direction, both rose.
- Interpret the size: since 0.6 is less than 1, supply is price inelastic over this range, quantity supplied changed proportionately less than price, suggesting firms had limited spare capacity.
Practice questions
Try each question, then tap to reveal the answer.
Q1State the formula for price elasticity of supply (PES).Show answer
Answer: PES = percentage change in quantity supplied / percentage change in price.
Q2Why is PES normally a positive number?Show answer
Answer: Because price and quantity supplied normally move in the same direction along an upward-sloping supply curve.
Q3What does a PES of 0 (perfectly inelastic supply) mean, and what does its diagram look like?Show answer
Answer: Quantity supplied does not change at all regardless of price - it is fixed, shown as a vertical supply curve.
Q4Name two determinants of price elasticity of supply.Show answer
Answer: Any two of: the time period allowed for producers to respond, the amount of spare capacity, the ease/cost of storing stock, or the mobility of factors of production between uses.
Q5Why does supply of a freshly harvested crop tend to be price inelastic in the very short run?Show answer
Answer: Because the crop has already been grown and harvested for the season, so the quantity available cannot be increased quickly regardless of a rise in price.
Q6The price of a good falls by 12% and quantity supplied falls by 30%. Calculate PES.Show answer
Answer: PES = -30% / -12% = 2.5.
Q7Explain why firms with spare production capacity tend to have more elastic supply.Show answer
Answer: Because they can increase output quickly in response to a price rise using existing unused machinery and staff, without needing time to invest in new capacity.
Exam-style questions
Written in the style of a A Level Economics exam paper, with a full mark scheme.
A furniture manufacturer has spare factory capacity. Explain, using the concept of price elasticity of supply, why its supply of a particular chair is likely to be more price elastic in the long run than in the short run.
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Evaluate the extent to which price elasticity of supply explains why house prices in the UK have risen sharply in areas of high demand.
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