Price Elasticity of Supply (PES)
1. What is PES?
Definition: PES measures the responsiveness of quantity supplied (QS) to a change in price. Price change → QS change (that is the Law of Supply: price and QS have a positive relationship).
(QS = dependent variable on top · Price = independent variable below)
| PES value | Type of supply | Responsiveness |
|---|---|---|
| > 1 | Elastic | high |
| < 1 | Inelastic | low |
| = 1 | Unitary elastic | equal |
| ∞ | Perfectly elastic | perfect |
| 0 | Perfectly inelastic | none |
2. Five Types of PES
① Elastic supply — PES > 1
- Greater than 1 · high responsiveness · QS changes by a larger %
- More resources available, readily available, spare capacity, large warehouse
- Flatter curve · e.g. mobile phones, cars, non-perishable items (first lesson: soft drinks)
- Price ↑ 10% → QS ↑ 50% → TR ↑
② Inelastic supply — PES < 1
- Less than 1 · low responsiveness · QS changes by a smaller %
- Less resources / less spare capacity · time-taking · not readily available
- Steep curve · e.g. coffee beans, fruits, agricultural / perishable items, nuclear weapons
- Price ↑ 50% → QS ↑ 10% → TR ↑
③ Unitary elastic supply — PES = 1
- Equal responsiveness · Price ↑ 10% → QS ↑ 10% → TR ↑
- e.g. televisions, laptops · straight line starting from the origin
- Chain: D ↑ → shortage → Price ↑ 10% → QS ↑ 10% → TR ↑
④ Perfectly elastic supply — PES = ∞
- Perfect resources available · infinite quantity can be produced / sold — same product, same price
- Spare capacity exists · large warehouse available · horizontal curve
- Price constant, QS ↑ 10% → TR ↑ 10% · e.g. wheat / rice
⑤ Perfectly inelastic supply — PES = 0
- No responsiveness · no change in QS · fixed quantity can be produced / sold
- No resources available · no spare capacity · vertical curve (board wrote “D → V.C.”, i.e. the supply curve is the vertical one)
- Price ↑ 50%, QS unchanged → TR ↑ 50% · e.g. Bitcoin, nuclear weapons
| Type | PES | Curve | Price ↑ / QS / TR | Eg. |
|---|---|---|---|---|
| Elastic | >1 | flatter | 10% / ↑50% / ↑ | mobile phones, cars |
| Inelastic | <1 | steep | 50% / ↑10% / ↑ | coffee beans, fruits |
| Unitary | =1 | line from origin | 10% / ↑10% / ↑ | TVs, laptops |
| Perfectly elastic | ∞ | horizontal | 0% / ↑10% / ↑10% | wheat, rice |
| Perfectly inelastic | 0 | vertical | 50% / – / ↑50% | Bitcoin, nuclear weapons |
Written answer lines (as on the board)
3. Factors Affecting PES
Elastic ⇐ more resources, spare capacity, large warehouse, readily available. Inelastic ⇐ less resources, no spare capacity, time-taking.
| Factor | If it helps → elastic | If it is missing → inelastic |
|---|---|---|
| ① Availability of raw material / resources | raw material in bulk ⇒ price change brings a larger ΔQS (can produce more goods) | not in bulk ⇒ smaller ΔQS (can produce less) |
| ② Warehouse / spare capacity | large warehouse ⇒ can change supply by more as they can store goods | no warehouse ⇒ supply cannot change much, limited quantity sold |
| ③ Technology | latest technology ⇒ produce goods quickly, product readily available | none ⇒ cannot produce more, time-taking |
| ④ Nature of commodity | Agricultural goods: supply inelastic in the short run — output depends on the harvesting period (e.g. coffee beans). Beef & milk also inelastic — it takes time to increase herds of beef / dairy cattle. | |
| ⑤ Ease & cost of factor substitution | How possible it is to bring new factors (capital, labour) into production. If they are occupationally mobile they can be substituted in easily ⇒ more elastic. | |
4. PES Calculation
| Price | QS | |
|---|---|---|
| Old | 2 | 10,000 |
| New | 2.50 (as written) | 10,500 |
5. Usefulness of PES to a Producer
Aim: producer wants to maximise TR. PES gives information → identify elasticity → helps investment decisions (invest in new technology; is there spare capacity or not?) and which products to focus on.
D ↑ → shortage → Price ↑ (10%) → QS ↑ (50%) → Sales ↑ → TR ↑ ⇒ TR > TC → profit ↑ · easy to meet customers’ demand
D ↓ → surplus → Price ↓ (10%) → QS ↓ (50%) → TR ↓ but losses avoided ⇒ resources are diverted towards another product which is profitable
D ↑ → shortage → Price ↑ (50%) → QS ↑ (10%) → can it respond? ⇒ depends on spare capacity (investment decision)
⇒ fix: latest technology → less time-taking to produce
6. Disadvantages / Limitations of PES ★ (Evaluation)
- Time consuming to calculate / collect data
- It is an estimate, so can be inaccurate
- Is the change in demand permanent? (unknown)
- Perishable / agricultural products have naturally inelastic supply — so knowing the value may have little use
- Value of PES changes over time and has less importance in a growing economy
- Practicability of increasing PES? (can the firm actually make supply more elastic?)
- Cost of making supply change?
7. Past-Paper Questions on the Board
Use examples to explain why the supply of some products is price elastic and the supply of other products is price inelastic.
Board plan: ① Define PES + formula ② Define elastic supply ③ Define inelastic supply (teacher’s split: 3K · 2A · 2E) ④ Factors affecting PES → availability of resources / raw materials · nature of commodity · warehouse / spare capacity · technology · ease & cost of factor substitution ⑤ Evaluation → value of PES may change over time; some products naturally have an inelastic supply.
Mark scheme (m22_ms_32): K — what PES measures (1) + formula (1). Application, elastic: factor identified (1) + why (1) + explanation of the factor (up to 3). Application, inelastic: same (up to 3). Note: the scheme itself gives 2 K + 6 A — follow it. (3(b) of this paper is on fiscal policy and AS — not PES.)
Summer 2018: water shortage after a long dry spell. Explain whether you expect PES of water to be relatively elastic or inelastic.
Mark scheme (s20_ms_22): 2 marks K (measures + accurate formula) · 3 marks application — why water might be price elastic with reference to the factors · 3 marks — why it might be price inelastic. (3(b) [12]: short- & long-term policies for a water shortage, up to 8 marks analysis.) The teacher showed this question but did not write an answer plan on the pages I saw.
PES of a new smartphone is estimated at 0.8 in the short run and 1.5 in the long run. Explain PES and suggest why the estimates differ.
Teacher’s annotations: 0.8 → inelastic supply · 1.5 → elastic supply · underline “price elasticity of supply” and “why estimates differ”.
Why differ: in the SR firms have fixed capacity / little stock, raw materials and technology take time to adjust ⇒ inelastic; in the LR they can expand capacity, new firms enter, resources are substituted ⇒ elastic.
Mark scheme (s20_ms_23): up to 2 K (what PES measures 1, accurate formula 1) + up to 6 for application — explanation of the factors determining the difference between the two estimates. 2(b) [12]: PED vs XED usefulness to a smartphone manufacturer (8 analysis: PED up to 4, XED up to 4).
Explain two factors that determine the PES of a manufactured product. Underline: two factors · determine · PES · manufactured product.
Mark scheme (m22_ms_21): K up to 2 — definition / formula; the 2nd mark needs % change in both Q and P. Application: 1st factor (1 identify + up to 2 explain = 3) and 2nd factor (3) ⇒ 6 max.
Definition: % change in QS of a product ÷ % change in its price.
Guidance factors: number of producers (many ⇒ more; not if monopoly) · spare capacity (⇒ more elastic) · ease of storing stocks (manufactured easier than perishable ⇒ elastic) · time period (more firms join ⇒ elastic) · factor mobility (easier to move resources ⇒ more elastic) · time taken to produce (shorter ⇒ more elastic).
PES for a new smartphone is estimated at 0.8 (SR) and 1.8 (LR). Explain what these estimates mean for producers and consumers and consider why they differ.
Mark scheme (w23_ms_23): AO1 (3) — meaning of PES (1), accurate formula (1), explain elastic / inelastic as responsiveness of supply to price (1). AO2 (3) — why values differ: time period, level of stock, changes in production process… (up to 2 per reason, max 3). AO3 (2) — assess why impact on consumers and producers differs: availability, pricing, investment decisions.
Teacher’s red star note: factors affecting Demand/PED and Supply/PES.
Discuss whether knowledge of PED or PES is more useful for a car manufacturer. Marks: 4K · 4A · 4E.
Board plan: ① Define PED + formula ② Define elastic / inelastic demand ③ Usefulness of PED to a car manufacturer — aim: TR maximise → identify elasticity → set pricing strategy; other way: price discrimination. ED: price ↓ (10%) QD ↑ (50%) TR ↑ + graph with TR area + explain. IED: price ↑ (50%) QD ↓ (10%) TR ↑ + graph + explain.
④ Define PES + formula ⑤ Define elastic / inelastic supply ⑥ Usefulness of PES to a car manufacturer → identify elasticity → investment decisions → whether to produce a product or not ⑦ Evaluation / judgement → limitations of PES (section 6) and which is more useful.
Elasticity essay-question bank (AS Micro essay questions, as listed on the board)
★ = teacher underlined (PES / supply-side). Questions 12, 24, 25 and 29 were not visible in the pages shown.
| No. | Question | Paper |
|---|---|---|
| 1 | (a) How knowledge of a good’s PED helps assess effect of price changes on TR [8] | 9708/22/F/M/19 |
| 2 | (a) How elasticity distinguishes inferior goods from necessary goods when incomes change [8] | 9708/22/M/J/19 |
| 3 | (b) How businesses might change PED for their products; which approach most successful [12] | 9708/22/M/J/19 |
| 4 | (b) Extent a supermarket could use YED for different types of goods when incomes rise [12] | 9708/21/O/N/19 |
| 5 | (a) With diagram, effect & incidence of a subsidy in a market for essential transport [8] | 9708/21/O/N/19 |
| 6 | (a) How knowledge of PED helps businesses assess price changes on TR [8] | 9708/22/O/N/19 |
| 7 ★ | (a) Water shortage summer 2018 — is PES of water relatively elastic or inelastic? [8] | 9708/22/M/J/20 |
| 8 ★ | (a) Smartphone PES 0.8 SR, 1.5 LR — explain PES and why estimates differ [8] | 9708/23/M/J/20 |
| 9 ★ | (b) For a smartphone manufacturer, is PED or XED more useful? [12] | 9708/23/M/J/20 |
| 10 | (a) XED of bread: +1.4 w.r.t. rice, −0.7 w.r.t. butter — explain why they differ [8] | 9708/21/O/N/20 |
| 11 | (b) Implications of PED and YED for business decisions; which more useful [12] | — |
| 13 | (a) Explain YED and, with examples, show how it determines normal or inferior good [8] | 9708/23/O/N/20 |
| 14 ★ | (b) Is knowledge of PED or PES more useful for a car manufacturer? [12] | 9708/23/O/N/20 |
| 15 | (a) Use XED to measure impact on car demand of a rise in fuel price and public transport price [8] | 9708/22/F/M/21 |
| 16 | (a) With diagrams, consumer surplus after a price fall: luxury (many substitutes) vs essential (few) [8] | 9708/21/M/J/21 |
| 17 | (b) Extent YED is more useful than XED to a business [12] | — |
| 18 | (a) How XED distinguishes substitutes, complements and unrelated goods [8] | 9708/22/M/J/21 |
| 19 | (b) Recession: extent YED and PED useful to an entrepreneur; which more useful [12] | 9708/22/M/J/21 |
| 20 | (a) XED hotels in Barbados w.r.t. flight price −2.5; flights to Antigua +0.5 — explain & effects [8] | 9708/23/M/J/21 |
| 21 ★ | (b) Are business decisions more influenced by knowledge of PED or PES? [12] | 9708/21/O/N/21 |
| 22 | (a) Consumer surplus; effect of indirect tax on elastic vs inelastic demand good [8] | 9708/22/O/N/21 |
| 23 | (a) Using PED: why raising price is bad for a good that is a large share of income, good if small share [8] | 9708/23/O/N/21 |
| 26 ★ | (a) Explain two factors that determine PES of a manufactured product [8] | 9708/21/M/J/22 |
| 27 | (b) Tax on manufactured necessities — does incidence always fall mainly on the producer? [12] | 9708/21/M/J/22 |
| 28 | (a) With diagrams, YED: fall in incomes on equilibrium P and Q of a normal good vs an inferior good [8] | — |
| 30 | (a) Two factors determining PED for a brand of car and how PED may change over time [8] | 9708/21/O/N/22 |
| 31 | (b) PED or YED of greater use to a business producing cars? [12] | 9708/21/O/N/22 |
| 32 | (a) With a formula, meaning of XED and which determinants matter most for size and sign [8] | — |
Quick Recap — PES Cheat-Sheet
- PES = %ΔQS ÷ %ΔP · %Δ = (New − Old) ÷ Old × 100 · measures responsiveness of QS to price (Law of Supply, positive relationship)
- >1 elastic (flat, QS ↑ more) · <1 inelastic (steep) · =1 unitary (line from origin) · ∞ horizontal · 0 vertical
- Price ↑ → QS ↑ → TR ↑ · Price ↓ → QS ↓ → TR ↓
- Factors: raw materials · warehouse / spare capacity · technology · nature of commodity (agriculture inelastic in SR) · factor substitution; + number of producers, ease of storing stocks, time period, factor mobility, time to produce
- Usefulness (aim TR max): identify elasticity · investment decisions (new technology, spare capacity) · products to focus on · elastic → easy to respond, inelastic → outsource / expand capacity
- Limitations: time consuming · estimate, inaccurate · is demand change permanent? · perishables naturally inelastic · value changes over time · practicability & cost of changing supply
- 8-marker (a): define PES + formula → elastic / inelastic → factors with examples → evaluate. 12-marker (b): 4K · 4A · 4E — usefulness of PED vs PES, then judge.