Table of Contents
Price Elasticity of Supply
| Price Elasticity of Supply is a measure of the responsiveness of the quantity of a good supplied to changes in its price. |
Formula
The formula can be abbreviated into:
Simplifying the above formula can be rewritten as:
The Sign of PES (+ / -)
Similar to PED, remember that when calculating the PES, it is not in percentage (there are no units), and it is standard practice to remove the ‘-‘ sign and treat the PES as a positive number.
In mathematics, this is known as taking the absolute value, which is used to minimize misunderstanding while making assumptions and comparing different PES values.
Example Question
Question 1
Suppose the price of strawberries increases from €3 per kg to €3.50 per kg, and the quantity of strawberries supplied increases from 1000 to 1100 tonnes per season. Calculate PES for strawberries.
Price elasticity of supply for strawberries is 0.59.
Question 2
If we know PES and the percentage change in P (price), we can calculate the percentage change in Q (quantity). Suppose PES = 2.0 and price of claw clips increases by 10%. Calculate the percentage change in Q supplied!
So, quantity supplied increased by 20%.
Question 3
We can also calculate the percentage change in P if we know PES and the percentage change in Q demanded. Suppose PES = 0.6 and quantity supplied of apples decreases by 6%. Calculate the percentage change of P!
So, price decreased by 10%.
Characteristics of Price Elasticity of Supply
| Value of PES | Classification | Interpretation |
| Frequently encountered cases | ||
| 0 < PES < 1 (greater than zero and less than one) | inelastic supply | quantity supplied is relatively unresponsive to price |
| 1 < PES < ∞ (greater than one and less than infinity) | elastic supply | quantity supplied is relatively responsive to price |
| Special cases | ||
| PES = 1 | unit elastic supply | percentage change in quantity supplied equals percentage change in price |
| PES = 0 | perfectly inelastic supply | quantity supplied is completely unresponsive to price |
| PES = ∞ | perfectly elastic supply | quantity supplied is infinitely responsive to price |
Supply Curves and PES
Frequently encountered cases
Note: The variety of supply curve and PES(s) indicate that the flatter a supply curve is, the more elastic the supply (higher PES). The steeper a supply curve is, the more inelastic the supply (lower PES).
Special cases
Determinants of Price Elasticity of Supply
Length of Time
The amount of time businesses have to adjust their inputs and the quantity supplied in response to changes in price is a crucial factor to consider when determining the elasticity of products (in terms of supply). In the short run, the business may be unable to increase or decrease any of its inputs to change the quantity it produces. In this case, supply is highly inelastic and may even be perfectly inelastic (PES = 0).
As the length of time that business have increases, the responsiveness of quantity supplied to price changes begins to rise, and PES increases.
If a longer time period goes by, the ability of businesses to respond to price changes becomes much greater. Therefore, the greater the amount of time businesses have to adjust their inputs increases, the higher the PES.
Mobility of Factors of Production
The more easily and quickly resources can be shifted out of one line of production and into another (where price is increasing), the greater the responsiveness of quantity supplied to changes in price, and hence the greater the PES. For instance, a farm worker can move more easily from lettuce cultivation to radish cultivation than the same farm worker can move to clothing production.
Spare Capacity of Firms
The ease with which the business can increase production also determines how elastic or inelastic a supply is. For example, factories or equipment which are idle or not in use.
If this happens, it will be easier for firms to respond to a price rise. But if the firm’s capacity is fully used, it will be more difficult to respond to a price rise.
However, shortages of critical factor inputs (skilled workers, components, fuel) will often lead to an inelastic PES. This particularly happens with agricultural products, where it takes time to alter the type of crops produced.
In conclusion, the greater the spare (unused) capacity, the higher the PES (the more elastic the supply).
Ability To Store Stocks
Some businesses store stocks of output they produce but do not sell right away. Stocks allow companies to meet variations in demand through output changes rather than price changes, so the more easily manufacturers can do this, the higher the PES.
Obviously, businesses that have an ability to store stocks are likely to have a higher PES for their products than businesses that cannot store stocks.
Rate At Which Costs Increase
If the costs of producing extra output increase rapidly, then supply will be inelastic, as businesses will have difficulty expanding their output. No business will want to incur large costs. On the other hand, if the costs of producing more output rise slowly, it will be easier for businesses to increase their output so supply will be elastic.
For example, if the price of sugar is rising rapidly, raising the factory’s cost of production, the candy business will find it more difficult to expand output faster, therefore PES is likely to be lower than if the price of sugar were stable.
Applications of Price Elasticity of Supply (HL Only)
PES in relation to primary commodities and manufactured products
| Why the PES for primary commodities is relatively low and the PES for manufactured products is relatively high? |
Primary commodities typically have lower PES than manufactured products due to the time required for quantity supplied to respond to price changes. Agriculture requires a long time for resources to be shifted, and farmers need at least a planting season to respond to higher prices. In some regions, land suitable for agriculture is shrinking due to environmental destruction caused by overfarming. To increase crop yields, technological changes in agriculture, such as new seeds or more productive inputs, take a long time.
Additionally, better irrigation systems are needed, especially in countries facing water shortages. These factors explain why agricultural commodities take longer to respond to price increases. In contrast, other primary products like oil, natural gas, and minerals require time to invest and begin production. Firms often do not respond quickly to price increases, waiting for a serious shortage before taking action to increase production.
Primary Commodities: Demand Shifts With Inelastic Supply
Manufactured Products: Demand Shifts With Elastic Supply
Short Term and Long Term Price Elasticities of Supply
| Commodity | Short term PES | Long term PES |
| Cabbage | 0.36 | 1.20 |
| Cucumbers | 0.29 | 2.20 |
| Green peas | 0.31 | 4.40 |
| Cauliflower | 0.14 | 1.10 |
| Carrots | 0.14 | 1.00 |
Note: the longer the time producers have to make the necessary adjustments, the greater the responsiveness of quantity supplied to price changes.
Simple Review Questions
- Explain the meaning of price elasticity of supply.
- Using examples, explain the determinants of PES.
- Suppose that in response to an increase in the price of good A from $8 to $14 per unit, the quantity of good A produced.
a) does not respond at all during the first week
b) increases from 12 000 units to 14 000 units over five months
c) increases from 10 000 units to 15 000 units over two years. Calculate PES for each of these three time periods, and identify when it is price elastic, price inelastic, or perfectly inelastic. - Explain the factors can account for the difference in the size of the three elasticities of question 3.
- Draw a supply curve that corresponds to each of the three elasticities in a single diagram.
- Explain why the PES for many primary commodities is relatively low and for many manufactured products is relatively higher.
Past Paper Review Questions
Question 1
a) While the price elasticity of supply for primary commodities is often relatively low, that of manufactured goods is relatively high. Using diagrams, explain why. [10 marks]
b) ‘A producer of a good can expect to increase total revenue by increasing the price of the good produced and sold.’ Examine the validity of this statement, using diagram(s) in your answer. [15 marks]
Answer
a) Points:
- Definitions of primary commodities, price elasticity of supply.
- Theory of price elasticity of supply (PES), price elastic supply, price inelastic supply, with reference to why PES for primary commodities is low (usually PES < 1) and why PES for manufactured goods is relatively high (PES > 1).
- Diagrams showing elastic and inelastic supply.
- Examples of primary commodities and manufactured goods.
b) Points:
- Definitions of total revenue, price elasticity of demand.
- Theory of price elasticity of demand (PED), price elastic and price inelastic demand and relationship between TR and PED.
- Diagrams showing how PED varies along a straight-line demand curve, and the values of PED along different price ranges; showing what happens to TR depending on the value of PED.
- Examples of goods with price elastic and price inelastic demand.
- Synthesis or evaluation (examine).
- Examination may include: appropriate pricing strategies by the producer
interested in increasing total revenue require knowledge of PED for the
product.
Opinions or conclusions should be presented clearly and should be supported by
appropriate examples.
Question 2
a) Using examples, explain the factors that determine whether the supply of a good is price-elastic or price-inelastic. [10 marks]
b) Examine the relevance to producers and the economy of differing values of income elasticity of demand for primary products, manufactured products and services. [15 marks]
Answer
a) Points:
- Definitions of price elasticity of supply (PES).
- Theory of price elasticity of supply, price elastic supply, price inelastic supply, with reference to the range of values of PES and factors that lead to high or low PES values.
- Diagrams showing elastic and inelastic supply.
- Examples of goods with high or low PES with explanation.
b) Points:
- Definitions of primary products, income elasticity of demand.
- Theory of income elasticity of demand (YED), income elastic and income inelastic demand, with reference to YED values in relation to primary products, manufactured goods and services.
- Diagrams showing demand curve shifts for the three groups of products.
- Examples of such products and their likely respective YEDs.
- Synthesis or evaluation (examine).
- Examination may include: consideration of how the rate of growth of industries may be affected by the YED of the respective products produced; the relevance of this to rates of growth and profitability of firms within these industries; the relative rates of growth of the primary, secondary and services (tertiary) sector of economies, particularly economically less developed ones; (higher level) the relevance of low YEDs of primary products to deteriorating terms of trade with implications for the economy and producers.
Opinions or conclusions should be presented clearly and should be supported by appropriate examples.
Question 3
| Price ($ per hotdog) | Quantity Demanded (units) | Quantity Supplied (units) |
| 3 | 70 | 10 |
| 4 | 60 | 30 |
| 5 | 50 | 50 |
| 6 | 40 | 70 |
| 7 | 30 | 90 |
a) Calculate the price elasticity of supply (PES) if price increases from $5 to $6 per hotdog. [2 marks]
b) Comment on your answer to Question 3a (the value of PES).
c) Suppose the government provides a subsidy that enables the hotdog retailer to increase the level of output by 30 units at all price levels. Plot a suitable diagram to determine the new equilibrium price and quantity. [3 marks]
Answer
a) %∆Qs = (70 − 50) ÷ 50 = +40%
%∆P = (6 − 5) ÷ 5 = +20%
Hence, PES = +2.0.
Award 1 mark for the correct answer and 1 mark for showing appropriate working out.
b) As the PES = +2.0, this means that for every 1% increase in the price of hotdogs, there is a 2% increase in the quantity supplied. This means that supply is highly price elastic.
Award 1 mark for an answer that shows limited understanding of the demands of the question.
Award 2 marks for a good understanding of why the supply is price elastic, using the values calculated.
c)
| Price ($ per hotdog) | Quantity Demanded (units) | Quantity Supplied 1 (units) | Quantity Supplied 2 (units) |
| 3 | 70 | 10 | 40 |
| 4 | 60 | 30 | 60 |
| 5 | 50 | 50 | 80 |
| 6 | 40 | 70 | 100 |
| 7 | 30 | 90 | 120 |
Award 1 mark for a diagram that contains no more than one error or omission.
Award 2 marks for an accurate diagram, drawn to scale and fully labelled.
Award a further 1 mark for identifying the correct new equilibrium price ($4) and equilibrium quantity
(60 hotdogs).
Question 4
Angry Birds is a highly popular video game created by Finnish company Rovio, with more than 12 million customers having paid $0.99 each to download the game from Apple’s AppStore. With the use of an appropriate diagram, explain why the high level of demand for Angry Birds games has no direct effect on the selling price. [4 marks]
Answer
Award up to 2 marks for an accurately drawn and fully labelled diagram.
Award up to 2 marks for a concise explanation of the diagram, written in the context of Rovio and
Angry Birds.
Question 5
a) Explain whether the price elasticity of supply (PES) for oil (petroleum) is likely to be price elastic or price inelastic in the short run. [2 marks]
b) Explain whether the value of PES for oil (petroleum) is likely to increase over a longer time period. [2 marks]
c) Explain why the PES of commonly prescribed medicines is likely to be highly price elastic. [2 marks]
Answer
a) The supply of oil is price inelastic in the short run due to the time needed to raise investments into the
exploration, extraction, purification and distribution of oil. Hence, only in the long run can there be an
increase in the supply of oil (albeit a non-renewable resource). Alternatively, students could argue that supply can be somewhat price elastic if suppliers are operating below their productive capacity and/or have buffer stocks of oil that can be released onto the market.
Award 1 mark for an answer that shows limited understanding of the demands of the question.
Award 2 marks for an answer that shows good understanding of the possible value of PES for oil in the
short run.
b) In the long run, the supply of oil is more price elastic as new oil fields and sites might be discovered and/or improved technologies lead to more efficient extraction of oil. However, in the very long run, oil as a finite resource means that the price elasticity of supply will eventually become lower. This is especially the case as suppliers switch to alternative energy sources such as electric powered cars.
Award 1 mark for an answer that shows some understanding of the demands of the question.
Award 2 marks for an answer that shows good understanding of the possible value of PES for oil in the
long run.
c) The commonly prescribed medicines are likely to be mass produced, using automated technologies. This means the output of the health products can be changed with relative ease in order to meet changes in the market price of the product.
Award 1 mark for an answer that shows some understanding of the demands of the question.
Award 2 marks for an answer that shows good understanding of why the PES of commonly prescribed
medicines is price elastic.
Command Terms
References
- https://www.amazon.in/Economics-Diploma-Coursebook-Digital-Access/dp/1108847064
- https://www.amazon.com/Economics-Diploma-CD-ROM-Ellie-Tragakes/dp/0521186404
- https://www.cambridge.org/us/education/subject/business-and-economics/economics/cambridge-international-and-a-level-economics-3rd-edition/cambridge-international-as-and-a-level-economics-3rd-edition-coursebook-cd-rom?isbn=9781107679511
- https://www.amazon.com/Economics-IB-Diploma-Paul-Hoang/dp/1510479147
- https://www.ibdeconomics.com/uploads/1/1/7/5/11758934/ib_economics_-_command_terms.pdf
- https://kognity.com/products/ibdp/
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