Chapter - 9

PRICE ELASTICITY OF SUPPLY (PES)

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

 Definition: Price Elasticity of Supply (PES) measures the
responsiveness of quantity supplied due to the change in price.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

 𝐏𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐒𝐮𝐩𝐩𝐥𝐢𝐞𝐝 (𝐐𝐒)
PES =
𝐏𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐏𝐫𝐢𝐜𝐞 (𝐏)

NOTE:

𝐍𝐞𝐰 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲−𝐎𝐥𝐝 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲

• % ∆ QS = × 𝟏𝟎𝟎
𝐎𝐥𝐝 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲

𝐍𝐞𝐰 𝐏𝐫𝐢𝐜𝐞−𝐎𝐥𝐝 𝐏𝐫𝐢𝐜𝐞

•%∆ P= × 𝟏𝟎𝟎
𝐎𝐥𝐝 𝐏𝐫𝐢𝐜𝐞

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

Example - 1
Price of a product increases by 50% ; following which,
producers increase the supply by 30%. Calculate the PES.

% ∆ 𝐐𝐒
PES =
%∆𝐏
𝟑𝟎%
=
𝟓𝟎%
= 0.67 (price inelastic supply)

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

Example - 2
Calculate the PES.

Price Quantity
Old 20 100
New 25 180

% ∆ 𝐐𝐒
PES =
%∆𝐏
𝟏𝟖𝟎 − 𝟏𝟎𝟎
× 𝟏𝟎𝟎
𝟏𝟎𝟎
= 𝟐𝟓 − 𝟐𝟎
×𝟏𝟎𝟎
𝟐𝟎
= 3.2 (price elastic supply)

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

Example - 3
Calculate the PES.

Price Quantity
Old 20 100
New 25 110

% ∆ 𝐐𝐒
PES =
%∆𝐏

𝟏𝟏𝟎 − 𝟏𝟎𝟎
× 𝟏𝟎𝟎
𝟏𝟎𝟎
= 𝟐𝟓 − 𝟐𝟎
𝟐𝟎
×𝟏𝟎𝟎
𝟏𝟎
= 𝟐𝟓

= 0.4 (price inelastic supply)

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

Example - 4
Calculate the PES.
Price Quantity
Old 20 100
New 15 75

% ∆ 𝐐𝐒
PES =
%∆𝐏

𝟕𝟓 − 𝟏𝟎𝟎
× 𝟏𝟎𝟎
𝟏𝟎𝟎
= 𝟏𝟓 − 𝟐𝟎
𝟐𝟎
×𝟏𝟎𝟎
−𝟐𝟓
= −𝟐𝟓

= 1 (Unit elastic supply)

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

 □ Interpretation of the value of PES

1) ) If PES > 1 Price Elastic Supply

It means quantity supplied responds more than proportionately to a change in price.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

2) If PES < 1 Price Inelastic Supply
It means quantity supplied responds less than proportionately
to a change in price.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

3) If PES = 1 Unit Elastic Supply
It means quantity supplied responds proportionately to change
in price.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

4) If PES = 0 Perfectly Inelastic Supply
It means quantity supplied does not respond to a change in
price.
For example: Agricultural goods.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

5) If PES = ∞ Perfectly Elastic Supply
It means quantity supplied is completely sensitive to the price
at this point; even a minuscule decrease in price causes supply
to fall to zero.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

□Factors Affecting Price Elasticity of Supply:
1) Time period - The more time producers have to react to price changes, the easier it becomes for
them to adjust the supply. Therefore, supply will be inelastic in the short run but elastic in the long
run. For example, agricultural goods tend to be inelastic in the short run as it takes several months
for supply to increase because they take time to grow. Their production also depends on the
weather cycle and cannot be changed easily following price changes.
2) Availability of stock - If a firm has high levels of stock, supply will be elastic because it can be
changed easily following price changes. If a firm has low levels of stock or produces perishable goods
which cannot be stored, the supply will be inelastic.
3) Spare capacity - If there is plenty of spare capacity, then firms can easily increase supply by
utilizing unused resources. For example, if a firm has idle machinery and labour, supply will be more
elastic.
4) Production speed - Goods which have a simple production process and can be produced quickly
tend to have an elastic supply.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

 Q:1) Availability of stock or time period, explain which factor do you consider
to be more important?
Ans: If a firm has stock of goods, then it can respond to price changes quicker by
putting more goods out into the market.
However, this can only be done for a short period of time, that is - as long as the
stock lasts. Therefore, time period is the most important factor as, in the short
run, a firm can alter supply with available stock but not in the long run.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

Q:2) "It is always more difficult to increase the supply of agricultural goods than
manufactured goods."
Do you agree with this statement? Assess your answer.
Ans: Yes, agricultural goods take a very long time to grow. Therefore supply can only be
increased once the crop has been harvested and the next crop is planted. Agricultural goods
cannot be stored for a long period of time because they are perishable in nature. So, in the
short run, agricultural goods are more inelastic in supply than manufactured goods.

On the other hand, manufactured goods can be stored so their supply can be increased
instantly. If demand for manufactured goods rise, more spare capacity can be utilised,
provided it is available, eg, idle machinery. This will make supply of manufactured goods
elastic.

However, if there are agricultural goods stored at cold storage warehouses with preservatives,
then supply can be increased instantly even in off seasons.

Overall, agricultural goods tend to be inelastic in supply in the short run.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9

 THE END

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 9