www.igcseeconomics.

com - Resources, Past Papers, Notes, Exercises & Quizes

 Measuring PES

• This measures the % change in QS (quantity supplied) after a

change in price:

• PES = % change in QS

% change in Price

www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes

 Inelastic Supply

• This means that an increase in price leads to a smaller %

change in demand. Therefore PES < 1

www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes

 Supply could be INELASTIC because:
1. Firms operating close to full capacity.

2. Firms have low levels of stocks, therefore there are no surplus

goods to sell.

3. In the short term, capital is fixed in the short run e.g. firms do not
have time to build a bigger factory.

4. If it is difficult to employ factors of production, e.g. if highly skilled

labour is needed.

5. With agricultural products, supply is inelastic in the short run,

because it takes at least 6 months to grow crops; in September the
farmer cannot suddenly produce more potatoes if the price goes
up. www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes
 Elastic Supply

• This occurs when an increase in price leads to a bigger %

increase in supply, therefore PES > 1

www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes

 Supply could be ELASTIC because:

1. If there is spare capacity in the factory.

2. If there are stocks available.

3. In the long run, supply will be more elastic because capital

can be varied.

4. If it is easy to employ more factors of production.

www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes

 Determinants of PES

How firms respond to changes in market conditions, especially

price, is an important consideration for the firm itself, and to
an understanding of how markets work.
The key considerations are:
• Are resource inputs readily available?
• Are factors mobile - are workers prepared to move to
where they are needed?
• Can finished products be easily stored, and are there
existing stocks?
• Is production running at full capacity?
• How long and complex is the production cycle or
production process?

www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes

 What is the most desirable PES for a
firm?
It is desirable for a firm to be highly responsive
to changes in price and other market conditions.
This is because a high PES makes the firm more
competitive than its rivals and it allows the firm
to generate more revenue and profits.

www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes

 Improving PES
Because a high PES is desirable, it may be necessary for firms
to undertake actions that improve their speed of response to
changes in market conditions. Examples of these actions
include:
• Creating spare capacity
• Using the latest technology
• Keeping sufficient stocks
• Developing better storage systems
• Prolonging the shelf life of products
• Developing better distribution systems
• Providing training for workers
• Having flexible workers who can do a range of jobs
• Locating production near to the market
• Allowing inward migration of labour if there is a labour
shortage www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes
 Group activity
One group has to illustrate One group has to illustrate
and explain what would and explain what would
happen if the government happen if the government
applied a tax to a gave subsidies to an
particular good. organisation that
produced a particular
good.

Show your work on the A3 paper.

Present and explain your work to the class.
www.igcseeconomics.com - Resources, Past Papers, Notes, Exercises & Quizes