Price elasticity of supply
Key term: PES
A measure of the responsiveness of quantity supplied to changes in price. When the
price of a good or service changes we would also expect a change in the quantity
supplied BUT not a change in supply – i.e a movement along the supply curve not a shift
in the supply curve. The degree to which the quantity supplied changes depends on the
price elasticity of supply for the product, measured by the formulae:
% change in quantity supplied for the good or service / % change in the price of the
product.
Range of price elasticity of supply (PES) values
Goods and services with a PES value > 1 and < infinity are PES elastic (i.e a top heavy
fraction). Following a change in the price of a good or service then the % change in
quantity supplied for the product is greater than the initial % change in price.
Goods and services with a PES value < 1 and > 0 are PES inelastic (i.e a bottom heavy
fraction). Following a change in the price of product the % change in quantity supplied
for the good or service is less than the initial % change in price.
Goods and services with a PES value = 1 have unitary elasticity. Following a change in
price the resulting % change in quantity supplied will be equal to the % change in price.
Activities
1. Firms will adjust their supply of a good or service in response to changes in the selling
price. Following a rise in the price, which of the following businesses will find it easiest to
raise their output levels?
• car manufacturers
• bespoke shoe producers
• coffee producers.
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InThinking www.thinkib.net/Economics 1
Activity 2
The following diagrams illustrate the supply curve for two products, one represents a firm
producing children's toys and the other an olive farmer. Which is which?
Activity 3: A comparison of two businesses
Diagram 1 illustrates the market for
children's toys, or indeed many
manufactured products.
(a) Illustrate on the diagram a rise in
demand for children's toys. Draw the new
equilibrium.
(b) Following the rise in demand for their
product, how is the factory owner likely to
change her production levels in response
to both higher demand and higher prices?
(c) How easy will this be for the factory owner, presuming that skilled labour and sufficient
raw materials are available to increase production levels?
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A comparison with the olive farmer
Diagram 2 illustrates the market for olives, or
indeed many agricultural or primary products.
(a) Illustrate on the diagram a rise in demand
for olives. Draw the new equilibrium.
(b) Following the rise in demand for his
olives, how is the olive farmer likely to
change his production levels in response to
both higher demand and higher prices?
(c) How easy will this be for the farmer?
Activity 4: Other determinants of PES
Describe the impact of the following on the level of PES for any good or service.
(a) The degree to which costs rise in response to changes in output
(b) The level of unused capacity in the production unit
(c) The degree of mobility of the necessary factors of production
(d) The ability of the business to store stock or other raw materials
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InThinking www.thinkib.net/Economics 3
Activity 5: investigation
Investigate how long it takes to produce the following items:
• a Toyota car
• coffee (from planting the original tree to drinking your first cup)
• drilling for oil
• bespoke suit.
Explain the likely impact of your findings on the price elasticity of supply?
Activity 6: Degree of elasticity
Place the following descriptions in the box below the arrow, indicating the likely degree of
PES elasticity associated with the statement:
PES inelasticity (PES=0) PES=1 Perfect elasticity (PES=∞)
Goods with a PES close to 0 By contrast, goods with a high PES,
would be those with _______ will be those where the production
spare capacity. They are also facility has ____________ spare
likely to have a ________ capacity. They are also likely to
production time, use highly have a ________ production time,
________________ factor use factor resources, which are easy
resources, such as skilled labour to substitute, such as ________
or scarce resources. They are labour or __________
generally but not always resources. PES elastic goods are
agricultural / _____________ usually __________ goods or
products. _____________.
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InThinking www.thinkib.net/Economics 4
Activity 7 (Paper three type)
Watch the following short video before
attempting the short questions that follow:
1. Using the formulae % change in supply / %
change in price, calculate the PES elasticity of
the following goods and services and state
whether each is PES elastic, inelastic or PES
unitary:
a. Price goes from 50 TL to 90 TL causing
supply to rise from 60 units sold to 100
b. Supply rises from 10 – 20 following a rise
in price from 10 TL to 50 TL
c. Price falls from 100 – 50 and supply is
unchanged
d. Supply rises from 10 – 30 when price rises from 100 TL to 110 TL
Activity 8 – practise questions
1. A computer manufacturer produces computers and increases the price from $ 600 to $ 800.
Following the rise in price, the quantity supplied by the firm, each week, rises from 1 million
to 1.1 million units. In the months that follow the weekly output rises further to 1.8 million
units
a. Calculate the level of PES in the short run
b. Calculate the level of PES in the long run
c. Explain why the level of PES is greater in the long run than the short run?
2. The price and output of coffee beans is included in the table below:
$ per Kg Output (Kgs) PES
4 July 2018 1.60 350 -
13 August 2018 0.93 335
22 October 2018 1.45 345
11 March 2019 0.90 325
a. Complete the table by calculating the PES for coffee
b. Explain why the PES for the crop is PES inelastic
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c. Use an explanation of PES theory to explain why the price of coffee fluctuates over
relatively short periods of time?
3. Assign each of the following products to one of the following PES and PED curves - ski
equipment, bespoke shoes, diamonds, tickets for a football stadium, cheap T-shirts and bread:
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Activity 9: Reflection activity
Reflect on how PES theory can be used to explain some topical applications of economic
theory, which may be of use in your IB course?
Activity 10: Link to the assessment (HL)
PES questions will generally be found in paper one, with an example of a PES question from
the HL syllabus including:
Part (a)
Explain why the price elasticity of supply for primary commodities tends to be lower than the
price elasticity of supply for manufactured products. [10 marks]
Part (b)
“The price elasticity of supply for primary products tends to be lower than that for
manufactured goods and services.” Using real world examples, evaluate the implications of
this for producers of primary products, manufactured goods and services. [15 marks]
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InThinking www.thinkib.net/Economics 7
