A ctivity 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?
The olive farmer is illustrated by the first to the left, while the children's toy factory is represented
by diagram 2 (to the right).
 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?
The owner of the business will sense a potential rise in profit levels and will probably decide to
raise production levels in response.
(c) How easy will this be for the factory owner, presuming that skilled labour and sufficient raw
materials are available to increase production levels?
This should be relatively easy because the children's toys are made by a manufacturing process.
The owner of the factory may have to employ more staff temporarily and purchase more
supplies, he may even need to get his factory working longer hours - but she would probably be
able to raise production levels to meet this demand. This should be represented on your
diagram, where following a rise in price, there should be a greater than proportional change in
quantity supplied.
 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?
The owner of the business will sense a potential rise in profit levels and will probably also decide
to raise production levels in response.
(c) How easy will this be for the farmer?
Unlike our toy manufacturer, however, he cannot easily increase his crop yields as growing
olives for olive oil is a long process. Our farmer needs to make decisions about how much of his
field to devote towards olive trees at the beginning of the growing season. The growing process
then takes many months or years to turn into olive oil and so our farmer is unable to change
production levels mid season. This makes the product PES inelastic and should be represented
on your diagram, where following a rise in price, there should be a lower than proportional
change in quantity supplied.
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
If the production costs for a product were to rise significantly following a rise in output then firms
will be more reluctant to change output levels - making the good or service less PES elastic.
(b) The level of unused capacity in the production unit
If a firm has significant unemployed resources in its production process then it will more inclined
to raise output in response to a change in price, making the product more price elastic. By
contrast if a firm is operating at, or close to capacity, then it will tend to be less PES elastic.
(c) The degree of mobility of the necessary factors of production
If a firm can easily move factors of production around, between its different products then this
would tend to make the good or service more elastic. This might apply to a factory producing
different size containers in circumstances where the firm can easily switch production factors
between the production of one size of container and another.
(d) The ability of the business to store stock or other raw materials
If a firm is able to build up large volumes of stock then they will be able to respond to changes in
price easily and swiftly. This would make the product relatively price elastic.

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?
Toyota - 17 - 18 hours
Coffee - 4 years
Oil - 3 - 10 years depending on whether a government chooses to slow down the process
Bespoke suit - 24 - hours
The impact this has on supply is as follows: It is safe to assume that all entrepreneurs would wish
to raise output following a rise in price. The question is can they? Are they able to gain access
to additional raw materials or skilled labour? Does the factory have spare capacity and lastly,
how long is the production process? In other words from the information above we can observe
that the PES of Toyota (and most manufactured goods) is probably elastic. By contrast the PES
of oil and coffee (and most primary goods) is likely to be PES inelastic, while the PES of bespoke
manufactured goods is likely to be unitary.

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 would be those with ________ spare capacity. They are also likely
to have a ________ production time, use highly ________________ factor resources, such as
skilled labour or scarce resources. They are generally but not always agricultural /
_____________ products.

By contrast, goods with a high PES, will be those where the production facility has
____________ spare capacity. They are also likely to have a ________ production time, use
factor resources, which are easy to substitute, such as ________ labour or __________
resources. PES elastic goods are usually __________ goods or _____________.
Goods with a PES close to 0 would be those with limited spare capacity. They are also likely to
have a long production time, use highly scarce factor resources, such as skilled labour or scarce
resources. They are generally but not always agricultural / primary products.

By contrast, goods with a high PES, will be those where the production facility
has significant spare capacity. They are also likely to have a short production time, use factor
resources, which are easy to substitute, such as unskilled labour or plentiful resources. PES
elastic goods are usually manufactured goods or services.

Activity 7 (Paper three type)

Watch the following short video before attempting the short questions that follow:
Questions:
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 forcing supply to increase from 60 units to 100
67 / 80 = 0.84 (inelastic)
b. Supply rises from 10 – 20 following a rise in price from 10 TL to 50 TL
100 / 400 = 0.25 (inelastic)
c. Price falls from 100 – 50 and supply is unchanged
0 / 50 = 0 (perfectly inelastic)
d. Supply rises from 10 – 30 when price rises from 100 TL to 110 TL
200 / 10 = 20 (very elastic)

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
10% / 33% = 0.33
(b) Calculate the level of PES in the long run
80% / 33% = 2.42
(c) Explain why the level of PES is greater in the long run than the short run
In the week following the price rise, the computer manufacturer found it difficult to increase
production significantly. The factory would have been constrained by its relatively fixed supply
of labour and raw materials, required to raise output.
6 months later, however, the firm had the time to increase their production to meet the higher
price level. The firm could have increased its purchases of raw materials and diverted workers
towards production of the computer.
2. The price and output of coffee beans is included in the table below:

$ per Kg Output (Kgs)

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
Unlike the computer manufacturer, who is able to respond to the rise in price by quickly diverting
resources towards increased production, this option is not available for the coffee farmer. The
coffee takes a fall season to grow and ripen before it can be picked, making sudden changes
during the season almost impossible.
c. Use an explanation of PES theory to explain why the price of coffee fluctuates over relatively
short periods of time?
With production levels relatively fixed, any change in demand for the product will result in
significant variations in price, with producers unable to adapt their output levels to satisfy
changes in demand.
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:
Diagram 1 - ski equipment which is both a luxury product and a manufactured good.
Diagram 2 - diamonds as both a luxury good and a primary good. Miners cannot easily increase
their production following a change in price.
Diagram 3 - bread is an agricultural good and hence PES inelastic and also a basic necessity
making it PED inelastic.
Diagram 4 - mass production T−shirts, this is a manufactured good and hence PES elastic (the
manufacturer can easily change production output in response to changes in price). T−shirts are
also PED inelastic because they are low priced items and unlikely to be affected too heavily by
price.
Diagram 5 - tickets for a football stadium, as the supply is fixed and the demand would generally
be PED inelastic.
Diagram 6 - bespoke shoes, being a luxury product and hence elastic PED. Bespoke
manufactured products are also likely to PES unitary.

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?
Examples of appropriate responses:
Shortages of skilled labour in the workforce
The abundance of unskilled labour in many developing nations and the difficulty faced by many
Developed nations in absorbing large numbers of unskilled migrants into the workforce
Satisfying demand for products using increasingly scarce resources / raw materials
The supply of new housing and the difficulty of providing housing for rapidly growing populations
The supply of renewable energies as well as traditional carbon based energy sources
The impact of a low PES for many primary commodities on the economies of many Developing
nations.

Activity 10: Link to the assessment

(HL)
PES questions will generally be found in paper one, with examples of PES questions 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]
Command term: Explain
Explain means to provide reasons and causes - or in other words, explain why the economic
reasons why the PES of primary commodities is normally lower than the price elasticity of supply
for manufactured products.
Key terms to define: price elasticity of supply, primary products and manufactured goods.
This question also requires a recognition that two factors which have a significant influence on
the value of PES include the length of time to produce the good or service and the degree to
which costs rise in response to changes in output. As primary goods are extracted from the
ground it is very difficult to change output levels in the short run. For example crops require a full
growing season. By contrast firms producing manufactured goods and services can more easily
change their output levels.
Responses should also include suitable diagrams and provide examples of exceptions to this
rule, i.e. primary goods with high PES elasticity and manufactured goods or services with low
PES elasticity.
A diagram illustrating one PES inelastic good and one PES elastic good should also be added.
Part (b)
“The price elasticity of supply for primary products tends to be lower than that for manufactured
goods and services.” Using real life examples, evaluate the implications of this for producers of
primary products, manufactured goods and services. [15 marks]
Command term: Evaluate
Evaluate requires IB students to determine the significance of PES elasticity on the producers of
primary products, in comparison to firms producing manufactured goods and services.
Key terms to define: PES
Relevant real life examples include: LEDCs whose primary exports come from agricultural and
primary goods with low PES, making those nations particularly exposed to sharp changes in the
price of that commodity, over which they have little control and is a restraint to growth and
development.

Primary goods are generally extracted from

the ground and so it is very difficult to change output levels in the short run. For example crops
require a full growing season. By contrast firms producing manufactured goods and services can
more easily change their output levels. Many manufactured goods and services have a low
marginal cost.
This means that producers of primary goods will find it difficult to change their production levels
in response to changing market conditions, leaving those businesses exposed to changing
market conditions. A current example might include a number of LEDCs whose primary export is
oil and are suffering as a consequence of low oil prices. Those businesses will also find it difficult
to increase output levels in response to improving market conditions.
The situation facing producers of primary products should then be compared with that of firms
producing manufactured goods or services by way of comparison.
The better responses may also link their response to the difficulties faced by many LEDCs,
whose main export revenues come from the sale of primary goods.
Responses should also include diagrams to illustrate goods with high / low PES elasticity.

Internal assessment
The concept of supply elasticity is also one of the more popular concepts to include in an IA
portfolio, for example an article concerning the low PES of oil or other primary commodities and
how this impacts on the market price for that product.