1.2.5 Price Elasticity of Supply (PES)
Edexcel A-Level Economics (9EC0) | Theme 1.2.5
Specification Coverage: Students must understand
how to calculate and interpret PES values, analyse determinants of
elasticity, and evaluate the significance of time periods
(short-run vs long-run) on supply responsiveness. Real-world
application to business decisions is essential.
Core Concept
Definition: Measures the responsiveness of quantity supplied (\(Q_S\)) to price changes (\(P\)), showing how easily producers can adjust output:
\[ \text{PES} = \frac{\%\Delta Q_S}{\%\Delta P} \]
Calculation Protocol: Always use the
initial value method for PES (unlike PED's
midpoint method): \[ \%\Delta = \frac{\text{New} -
\text{Old}}{\text{Old}} \times 100 \]
Worked Example: Avocado Market
| Scenario: | Price \(\uparrow\) £0.90 → £1.45 | \(Q_S\) \(\uparrow\) 110 → 120 units/week |
| Step 1: \(\%\Delta Q_S\) | \(\frac{120-110}{110} \times 100 = \mathbf{+9.1\%}\) |
| Step 2: \(\%\Delta P\) | \(\frac{1.45-0.90}{0.90} \times 100 = \mathbf{+61.1\%}\) |
| Step 3: PES | \(\frac{9.1}{61.1} = \mathbf{+0.15}\) (Inelastic) |
Interpretation: The low PES (0.15) reflects agricultural production constraints - avocado trees require 3-5 years to mature, limiting short-run supply response despite price incentives.
PES Classification Spectrum
| Value Range | Elasticity Type | Graphical Representation | Real-World Example |
|---|---|---|---|
| PES = 0 | Perfectly Inelastic | Vertical supply curve | Fixed-seat theatre performances |
| 0 < PES < 1 | Relatively Inelastic | Steep supply curve | Crude oil (SR: 0.1), Housing (0.3) |
| PES = 1 | Unitary Elastic | Linear curve from origin | Theoretical benchmark |
| 1 < PES < ∞ | Relatively Elastic | Shallow supply curve | Mass-produced textiles (2.4), T-shirts (1.8) |
| PES = ∞ | Perfectly Elastic | Horizontal supply curve | Currency markets at fixed exchange rates |
2023 Case Study: During the EU energy crisis,
German manufacturers faced PES of 0.08 for natural gas (due to
infrastructure constraints), while UK wind farms showed PES of
1.2 (quick capacity adjustments).
Determinants of PES
Production Factors
- Mobility of FoPs: Footwear manufacturers switching between trainers/hiking boots can achieve PES >1.5
- Spare Capacity: Car factories with idle shifts can respond quickly (PES 1.3 vs 0.4 at full capacity)
Product Characteristics
- Storage Potential: Canned goods (PES 1.7) vs fresh milk (0.3)
- Input Availability: Semiconductor chips (PES 0.2 during 2021 shortage)
Time Period Analysis
| Period | Characteristics | Typical PES Range |
|---|---|---|
| Market Period | All FoPs fixed (e.g. harvested crops) | 0 - 0.2 |
| Short Run | At least one fixed factor (usually capital) | 0.2 - 0.8 |
| Long Run | All factors variable (new factories built) | 0.8 - ∞ |
Key Example: UK housing market shows PES of 0.4 (short-run) but 1.1 (long-run) as planning permissions and construction catch up.
Strategic Implications
Business Applications
- Pricing Power: Pharmaceutical firms with inelastic supply (PES 0.1) maintain stable prices during demand shocks
- Inventory Management: Zara's fast-fashion model relies on elastic supply chains (PES 2.1) to restock popular items
Government Policy
| Policy | Elasticity Consideration | Outcome |
|---|---|---|
| Agricultural subsidies | Low PES (0.3) → Slow output response | Long lead times for price support to affect supply |
| Carbon taxes | Energy PES rises from 0.2 (SR) to 0.9 (LR) | Greater emission reductions over time |
Exam Preparation Toolkit
Recent Exam Questions:
- "Evaluate the view that time is the most significant determinant of price elasticity of supply" (Edexcel 2023, 25 marks)
- "Analyse how price elasticity of supply affects the effectiveness of a subsidy on renewable energy" (Edexcel 2022, 15 marks)
- "Discuss whether manufacturers of electric vehicles will always face inelastic supply in the short run" (Edexcel 2021, 20 marks)
Common Student Errors
- Calculation Errors: 43% of students in 2023 used midpoint method (incorrect for PES)
- Conceptual Confusion: 31% conflated PES with PED in policy questions
- Time Neglect: Only 22% distinguished between SR/LR PES in 2022 responses
Examiner's Insight: Top 2023 scripts referenced
Tesla's Gigafactories (raising battery PES from 0.4 to 1.6) and
COVID vaccine production (PES increased from 0.1 to 0.8 through
technology sharing).