Price Elasticity of Supply (PES) (Edexcel IGCSE Economics)

Revision Note

Author

Steve Vorster

Expertise

Economics & Business Subject Lead

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

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

$PES = \frac{% change in quantity supplied}{% change in price} = \frac{% △ in QS}{% △ in P}$

To calculate a % change, use the following formula

$% Change = \frac{new value - old value}{old value} \times 100$

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

$% △ Q S = \frac{120 - 110}{110} \times 100 % △ Q S = 9.1 %$

Step 2: Calculate the % change in P

$% △ P = \frac{1.45 - 0.90}{0.90} x 100 % △ P = 61 %$

Step 3: Insert the above values in the PES formula

$PE S = \frac{% △ in Q S}{% △ in P} PE S = \frac{9.1 %}{61 %} PE S = 0.15$

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, likely due to the time it takes to grow additional avocados

Interpreting PES Values

The Values of PES Vary From 0 To Infinity (∞) & They Are Classified As Follows

Value and Name	Explanation	Diagram
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
1 Unitary Elasticity	Any supply curve that starts at the origin (e.g. S1, S2 or S3) has a PES value equal to 1. The %∆ in P = %∆ in QS