The Definition & Calculation 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
- 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
- PES can be calculated using the following formula"
- To calculate a % change, use the following formula:
Worked example
In recent months, the price of avocados has increased from AU$ 0.90 to AU$ 1.45. Bewdley Farm Shop in Margaret River has sought to maximise their profits by increasing the quantity supplied to the market. They have been able to increase sales from 110 units a week to 120 units a week.
Calculate the PES of avocados and explain one reason for the value
Step 1: Calculate the % change in QS
Step 2: Calculate the % change in P
Step 3: Insert the above values in the PES formula
Step 4: Explain one reason for the value
The PES value of 0.15 indicates that avocados are very price inelastic in supply. Even with a significant increase in price, suppliers are unable to supply more due to the time it takes to grow additional avocados
Worked example
The diagram below shows two market demand curves (D1 and D2) and the market supply curve (S) for Good X
(This image is a placeholder - new image in production)
The price elasticity of supply of Good X when the demand curve shifts from D1 to D2 is:
A +0.25
B +2.0
C +4.0
D +7.5
Step 1: Calculate the % change in QS
Step 2: Calculate the % change in P
Step 3: Insert the above values into the PES formula
The PES value of 4 indicates Good X is elastic in supply. Suppliers are very responsive to a change in price, they are able to increase output easily
Exam Tip
When doing elasticity calculations, make sure that your final answer for PES is not expressed as a percentage. This is a common error and loses marks.
In Paper 3 multiple choice questions, you are occasionally given the PES value and the %Δ in QD. You have to find %Δ in price. Follow the standard math procedure as follows:
1. Substitute the values provided into the equation
2. Substitute X for %Δ in price
3. Solve for X