2.6.1 Definition, Calculation & Determinants 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
  
  

 

• To calculate a % change, use the following formula
  
  

 

Worked Example

Step 1:  Calculate the % change in QS

   

Step 2: Calculate the % change in P

Step 3: Insert the above values in the PES formula

(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]

Exam Tip

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

• 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:

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. 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
   
   
3. 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)
   
   
4. 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
   
   
5. 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

Exam Tip