Price Elasticity of Supply

Unit 3 - Lesson 5
Learning Outcomes:
● Define all terms appearing in orange bold for section 3.3. (AO1)
● Use the formula for price elasticity of supply (PES) to calculate PES,
changes in price and changes in quantity. (AO4)
● Identify the degrees and range of values for PES. (AO2)
● Draw diagrams showing the range of values for PES, relatively elastic and
inelastic supply; and constant values for perfectly elastic and inelastic supply
and unitary supply. (AO4)
● Analyse the determinants of PES. (AO2)
● Apply PES to analyse the reason why primary commodities generally have
lower PES than manufactured products. (AO2)
Use the formula for price elasticity of supply (PES) to calculate PES,
changes in price and changes in quantity. (AO4)

Price Elasticity of Supply (PES)

● Measure the responsiveness of producers to a change in price of a good or

service.
○ When price increases how much will the quantity supplied increase?
○ When price decreases how much will the quantity supplied decrease?

Price Elasticity of Supply (PES) Formula

% change in quantity supplied

PES = ----------------------------------------------
% change in price
Use the formula for price elasticity of supply (PES) to calculate PES,
changes in price and changes in quantity. (AO4)

The price of strawberries increases from $3 per kilo to $3.50 per kilo, and the
quantity supplied of strawberries increases from 1,000 to 1,100 tonnes per
season. Calculate the PES.

Step 1: Calculate the % change in price.

New # - Old # $3.50 - $3.00 .50

% change = ------------------------x 100 = --------------------- = -------- X 100 = 16.66%
Old # $3.00 3.00

The percentage increase in price from $3.00 per kilo to $3.50 per kilo
is 16.66%
Use the formula for price elasticity of supply (PES) to calculate PES,
changes in price and changes in quantity. (AO4)

The price of strawberries increases from $3 per kilo to $3.50 per kilo, and the
quantity supplied of strawberries increases from 1,000 to 1,100 tonnes per
season. Calculate the PES.

Step 2: Calculate the percentage change in quantity supplied

New # - Old # 1,100 - 1,000 100

% change = -------------------- X 100 = --------------------- = ---------- X 100 = 10%
Old # 1,000 1,000

The percentage increase in quantity supplied from 1,00 to 1,100

tonnes per season is 10%
Use the formula for price elasticity of supply (PES) to calculate PES,
changes in price and changes in quantity. (AO4)

The price of strawberries increases from $3 per kilo to $3.50 per kilo, and the
quantity supplied of strawberries increases from 1,000 to 1,100 tonnes per
season. Calculate the PES.

Now that you have the percentage change in price and quantity supplied, plug
your numbers into the formula and solve for PES.

% change in quantity supplied 10%

PES = ----------------------------------------- = ------------- = + 0.60
% change in price 16.66%

For every 1% increase in price the quantity supplied will increase by

0.60%.
Identify the degrees and range of values for PES. (AO2)

Whenever you calculate the PES for a good or service your answer should always
be positive (+).

● This is because of the Law of Supply that states there is a direct relationship
between the price of a good and the quantity supplied.
○ If your answer is a negative number you know you made a mistake.

Price Elasticity of Supply < 1

● Price Inelastic
● Producer is relatively less responsive to a change in price.
● Percentage change in price is greater than the percentage change in
quantity supplied.
● The supply curve extends upward and to the right from the horizontal axis.
Identify the degrees and range of values for PES. (AO2)

Price Elasticity of Supply < 1

● Price Inelastic
● Producer is relatively less
responsive to a change in price.
● Percentage change in price is
greater than the percentage
change in quantity supplied.
● The supply curve extends upward
and to the right from the
horizontal axis.
Identify the degrees and range of values for PES. (AO2)

Price Elasticity of Supply > 1

● Price Elastic
● Producer is relatively more
responsive to a change in price.
● Percentage change in price is
less than the percentage change
in quantity supplied.
● The supply curve extends upward
and to the right from the vertical
axis.
Identify the degrees and range of values for PES. (AO2)

Price Elasticity of Supply is Unitary = 1

● Percentage change in price is equal to

the percentage change in quantity
supplied.
● Any supply curve that passes through the
origin has a PES = 1.
● Along any straight line that passes
through the origin regardless of
steepness, between any two points on
the line the percentage change in price
is equal to the percentage change in
quantity supplied.
Identify the degrees and range of values for PES. (AO2)

Perfectly Inelastic Supply - PES = 0

● A percentage change in price does

not result in any change in
quantity supplied.
● The producer is not responsive to a
change in price.
● Examples: the supply of fish in the
ocean at a specific period of time, a
harvest of vegetables for a season.
Identify the degrees and range of values for PES. (AO2)

Price Elasticity of Supply is equal to

infinity

● Any change in price will result in

an infinite response in quantity
supplied for a good or service.
● Perfectly Elastic Supply.
Identify the degrees and range of values for PES. (AO2)

Summary table from Tragakes textbook - section 3.3

Analyse the determinants of PES. (AO2)

Just like demand, supply, price elasticity of demand. price elasticity of supply
has determinants.

Determinants of Price Elasticity of Supply

● Length of time
● Ability to store stock
● Spare capacity
● Mobility of resources
● Rate at which costs increase
Analyse the determinants of PES. (AO2)

Length of Time

● The amount of time that a producer has to adjust their inputs to respond to a
change in price is an important factor.
● Short-period of time
○ Over a short period of time a producer may not be able to increase or
decrease their inputs to respond to a change in price.
○ Therefore, price elasticity of supply tends to be inelastic.
○ % change in price is greater than the % change in quantity supplied
● As the length of time increases
○ The producer becomes more responsive to a change in price.
○ They are able to adjust their inputs more easily as price changes.

As time increases the producer becomes more sensitive to the change in price.
Analyse the determinants of PES. (AO2)

Mobility of Resources (Factors of Production)

The quicker a producer is able to shift resources out of a line of production and
shift them to another line where prices are increasing.

● The higher the price elasticity of supply.

● Producer is relatively more responsive to a change in price - elastic supply
● % change in price is less than % change in quantity supplied.

If resources cannot be shifted easily from production of one good to another with
increasing prices.

● The lower the price elasticity of supply

● Producer is less responsive to a change in price - inelastic supply
● % change in price is greater than the % change in quantity supplied.
Analyse the determinants of PES. (AO2)

Spare Capacity

● Amount of unused or idle capital.

○ A firm can produce 1,000 units of output in a day. If they are only producing
400 units of output in a day there is spare capacity of 600 units.
● The greater amount of spare capacity a firm has the more responsive they are
to a change in price.
○ Elastic Supply
○ Due to having spare capacity it is easy for a firm to increase their output.
● If a firm has very little or no spare capacity, the less responsive a firm is to a
change in price.
○ Inelastic Supply
○ Due to having little or no spare capacity it is difficult for a firm to increase their output.
Analyse the determinants of PES. (AO2)

Ability to Store Stock

● If a firm is able to store their stock, the more responsive the firm is to a
change in price.
○ Elastic Supply
○ Manufacture goods tend to be able to be stored thus having a higher
PES.
● If a firm is unable to store their stock, the less responsive they are to a
change in price.
○ Inelastic Supply
○ Commodities such as food tend to spoil if stored for extended periods of
time thus they have lower PES.
Analyse the determinants of PES. (AO2)

Rate at which Costs Increase

● If the cost to produce an additional unit of output increases rapidly, the

producer will be less responsive to the change in price.
○ Inelastic supply
○ Producer is less likely to want to incur large cost to produce additional
units of output.
● If the cost to produce an additional unit of output increases is low, the
producer will be more responsive to the change in price.
○ Elastic supply
○ Producer is more likely to want to increase their output because the cost
to do so is low.
Apply PES to analyse the reason why primary commodities generally
have lower PES than manufactured products. (AO2)
Primary vs. Secondary/Manufactured Goods

Primary Commodities

● Tend to have lower PES than manufactured Goods

● Reason for this is the amount of time needed to produce additional output in
response to a change in price.
○ Example: Agricultural goods.
○ Farmers need a planting season to respond to changes in price.
○ Additional land may be needed but not available. What is needed is increased crop
yields through the use of better technology which takes time.
● Oil, gas and minerals
○ Time is needed to make the necessary investment to begin production.
○ High costs prevent firms from responding quickly to price changes.
Apply PES to analyse the reason why primary commodities generally
have lower PES than manufactured products. (AO2)
Short period of time vs. long
period of time

We know that over short periods

of time that supply for primary
commodities is low due to the time
necessary for the producer to
respond to a change in price.

Therefore over longer periods of

time producers would be more
responsive to a change in price -
elastic supply.