1.2.5 Price Elasticity of Supply (PES)

Specification Coverage: Edexcel unit 1.2.5 - Price Elasticity of Supply (PES). Students must learn the calculation and interpretation of PES values, the key determinants of PES, and the distinction between short-run and long-run in economics.

Definition and Calculation

Price Elasticity of Supply (PES): Measures the responsiveness of quantity supplied to a change in the good's own price. It helps us understand how easily, quickly or cheaply producers can increase output when the price rises.

Formula:

\[ \text{PES} = \frac{\%\Delta Q_S}{\%\Delta P} \]

Interpreting PES Values

Diagram showing different PES values from perfectly inelastic to perfectly elastic
Figure 1: Price Elasticity of Supply ranges. Shows how the slope of the supply curve varies from vertical (perfectly inelastic, PES=0) to horizontal (perfectly elastic, PES=∞).
PES Value Classification Description & Example
PES = 0 Perfectly inelastic supply Quantity supplied cannot change (e.g., fixed number of theatre seats on a given night). The supply curve is vertical.
0 < PES < 1 Relatively inelastic supply The percentage change in quantity supplied is less than the percentage change in price (e.g., agricultural products, goods with complex production).
PES = ∞ Perfectly elastic supply The quantity supplied will fall to zero with any change in the price, but supply is unlimited at a specific price.
PES > 1 Relatively elastic supply The percentage change in quantity supplied is greater than the percentage change in price (e.g., manufactured goods like t-shirts).

Key Determinants of PES

The main factor influencing PES is time. The ability to increase supply is heavily constrained in the short run but improves in the long run.

Other Determinants:

Determinant Impact on PES
Spare Production Capacity If a firm has unused capacity, supply can be increased quickly (elastic). If at full capacity, supply is inelastic.
Ease of Storing Stocks/Inventories If goods can be stored cheaply, firms can release stocks to respond to price increases (elastic).
Mobility of Factors of Production If resources (labour, capital) can be easily switched between products, supply is more elastic.
Complexity of Production Simple, quick-to-produce goods have more elastic supply. Goods requiring rare materials or lengthy processes are inelastic.
Marginal Cost of Production If the marginal cost of producing additional units is low, supply is more elastic. If marginal cost is high, supply is more inelastic.

Short-Run vs. Long-Run Supply

Short Run: A period where at least one factor of production is fixed (e.g., factory size, number of machines). Supply is typically more price inelastic in the short run as firms cannot instantly expand all inputs.

Long Run: A period where all factors of production are variable. Firms can build new factories, hire more workers, etc. Supply is therefore more price elastic in the long run.

Exam Preparation

  1. PES is Positive: Unlike PED, PES values are positive due to the direct relationship between price and quantity supplied (the law of supply).
  2. Time is Crucial: The most important analytical point is that supply becomes more elastic over time. Always consider the relevant time period.
  3. Application: Use real-world examples. Perishable goods (e.g., fresh strawberries) have very inelastic short-run supply. Mass-produced factory goods (e.g., pens) have more elastic supply.
  4. Link to Production: Connect PES to the factors of production and the firm's ability to vary them. This shows deeper understanding.