Calculation & Determinants of PES (Cambridge International IGCSE Economics)

Introducing price elasticity of supply

Spec point — Definitionof PES; 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 in 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

Calculation of PES

• PES can be calculated using the following formula:

$\text{PES = } \frac{\% \text{change} \text{in} \text{quantity} supplied}{\% \text{change} \text{in} price} = \frac{\% \Delta \text{in} QS}{\% \Delta \text{in} \mathrm{P} }$

• To calculate a % change, use the following formula:

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

Worked Example Recently, the price of avocados has increased from £0.90 to £1.45. Bewdley Farm Shop in Wales has sought to maximise their profits by increasing the quantity supplied to market. They have been able to increase the supply of avocados 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

****$% \Delta Q S = \frac{120 - 110}{110} \times 100

% \Delta Q S = 9.1 %$****

Step 2: Calculate the % change in P

$% \Delta \mathrm{P} = \frac{1.45 - 0.90}{0.90} \mathrm{x} 100

% \Delta \mathrm{P} = 61 %$

Step 3: Insert the above values in the PES formula

$\text{PE} S = \frac{% \Delta \text{in} Q S}{% \Delta \text{in} \mathrm{P} }

\text{PE} S = \frac{9.1 %}{61 %}

\text{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

Exam Hint When doing elasticity calculations, make sure that your final answer is not expressed as a percentage. This is a common error that loses marks.

Drawing and interpreting PES values

Spec point — "perfectly inelastic, inelastic, unitary, elastic, perfectly elastic; Drawing and interpreting supply curve diagrams to show different PES"

Drawing and interpreting PES values

• The results of the price elasticity of supply calculation tell us how responsive producers are to a change in price

1. Price elastic supply

• The value of PES: 1 → ∞
• The quantity supplied changes more than proportionally to price

Price elastic supply

• Producers are very responsive to price changes

  • For example, a clothing factory in Bangladesh quickly increases T-shirt production when prices rise

2. Price inelastic supply

• The value of PES: 0 → 1
• The percentage change in quantity supplied is less than proportional to the percentage change in price

Price inelastic supply

• Producers are relatively unresponsive to price changes

  • For example, banana growers in Ecuador cannot increase output quickly due to growing time

3. Perfectly elastic supply

• The value of PES: ∞
• The quantity supplied will fall to zero with any percentage change in price (highly theoretical elasticity)

Perfectly elastic supply

• Producers will only sell at one price, and any change in price causes supply to drop to zero

  • For example, on international markets, a wheat exporter in Brazil may only sell at the global price

4. Perfectly inelastic supply

• The value of PES: 0
• The quantity supplied does not change at all, no matter the price

Perfectly inelastic supply

• For example, a stadium in Argentina with 50,000 seats can't supply more tickets, even if price rises

5. Unitary elasticity of supply

• The value of PES: 1
• The percentage change in quantity supplied is exactly equal to the percentage change in price

Unitary elastic supply

• Any supply curve that starts at the origin has unitary elasticity

  • S1, S2 and S3 all have a PES value equal to 1
  • The %∆ in P = %∆ in QS

• For example, a shoe manufacturer in Vietnam increases supply by 10% when price rises 10%

The determinants of PES

Spec point — 2.7.3 · main influences on whether supply is elastic or inelastic

• Some products are more responsive to changes in price than others
• This responsiveness is known as Price Elasticity of Supply (PES)
• The factors that affect how responsive supply is, are called the determinants of PES

The determinants of PES include the ability to store goods and the mobility of factors of production

1. Mobility of the factors of production

• If producers can quickly switch resources (e.g., labour, capital) between products, then PES will be higher (elastic)

• If resources are specialised or fixed, then supply is less responsive (inelastic)

  • For example, if the price of hiking boots rises, a shoe manufacturer who can easily shift workers and machinery from making trainers to boots will have elastic supply

2. Availability of raw materials

• If raw materials are easily available, producers can respond quickly to price changes → elastic supply

• If materials are scarce or hard to obtain, supply cannot increase easily → inelastic supply

  • For example, a chocolate producer with limited access to cocoa beans may find it harder to increase supply when prices rise.

3. Ability to store stock

• If goods can be stored easily, producers can build up inventory and release more when prices rise → elastic supply

• If goods cannot be stored (e.g., fresh flowers), supply will be more inelastic

  • For example, producers of tinned food can respond quickly to price increases because the products can be stored for long periods

4. Spare capacity

• If a firm has unused capacity (idle machines, underused staff), it can increase output quickly when prices rise → elastic supply
• If operating at full capacity, it cannot easily raise production → inelastic supply
• For example, a car factory with extra machinery and space can respond rapidly to rising demand

5. Time period

• In the short run, supply is usually more inelastic because firms need time to adjust production
• In the long run, supply becomes more elastic as firms can invest in more resources and change production processes
• For example, avocado farmers cannot instantly grow more avocados when prices rise — but over time, they can plant more trees and expand supply