Igcse Economics PES

OBJECTIVES Topics Guidance
Definition of PES -
Calculation of PES using the formula and interpreting
the significance of the result
Calculation of PES
Drawing and interpretation of supply curve diagrams
to show different PES
The key influences on whether supply is elastic or
Determinants of PES
inelastic
The implications for decision making by consumers,
Significance of PES
producers and government
Price elasticity of supply
Price elasticity of supply (PES) measures the responsiveness of the quantity
supplied of a product following a change in its price.
Supply is said to be price elastic if producers can quite easily increase supply
without a time delay if there is an increase in the price of the product. This can
help to give such a firm competitive advantage, as they are able to respond to
changes in price.
By contrast, supply is price inelastic if firms find it difficult to change production

in a given time period when the market price changes.
Interpretation of PES
The value of PES is always positive because to the law of supply, which states that an
increase in the market price of a product will lead to an increase in quantity supplied,
ceteris paribus. The opposite applies in the case of a fall in market price.
The value of PES reveals the degree to which the quantity supplied of a product responds to
changes in price.
The calculation of PES generally has two possible outcomes:
• If PES > 1.0 supply is price elastic, i.e. supply is responsive to changes in price (the percentage
change in quantity supplied is greater than the percentage change in).
• If PES < 1.0 supply is price inelastic, i.e. quantity supplied is relatively unresponsive to
changes in price (percentage change in quantity supplied is less than the percentage change in
price).
Interpreting supply curve diagrams and PES
price inelastic
In the above case, the proportional increase in price from

P1 to P2 is greater than the proportional increase in supply
from Q1 to Q2. This could be due to the lack of spare
capacity or the time required to raise supply in the market.
price elastic
In the case of price elastic supply, the increase in price

from P1 to P2 is less than the corresponding proportional
increase in supply from Q1 to Q2. This could be due to
firms having sufficient spare capacity to increase supply in
the market.
Although supply is typically classified as price elastic or price inelastic, there are three
theoretical extreme cases or possibilities for PES:
If the value of PES for a good or service is equal to 0, then

supply is said to be perfectly price inelastic. This means
that a change in price from P1 to P2 has no impact on the
quantity supplied. This is because the supply is fixed at
Qe, at least in the short run, because there is no capacity
for firms to raise output, irrespective of the increase in
price. Examples of products with such perfectly price
inelastic supply include seats at a sports stadium or
original art pieces by the likes of Picasso
If the value of PES for a good or service is equal to infinity
(∞), then supply is said to be perfectly price elastic. This
means that a change in the quantity supplied from Q1 to
Q2 can happen without the price having to have increased.
This is because the supply can increase without costs
increasing (so there is no need for price to have
increased), i.e. the price is fixed at Pe, at least in the short
run. This extreme case can happen because there is huge
spare capacity for firms to raise output, irrespective of the
price. An example is the supply of online apps that
consumers can download from their smartphones and
mobile devices. Firms can supply additional units of output
without having to raise their prices.
If the value of PES for a good or service is equal to 1 then
the situation is described as unitary price elastic supply.
This means that any percentage change in the price is
matched by the same proportional change in the quantity
supplied. Mathematically, this is illustrated by an upward
sloping supply curve that starts at the origin, irrespective
of the slope. So, S1, S2, and S3 in the above diagram
depict supply curves with a PES value of 1.
Determinants of price elasticity of supply
1. The degree spare capacity
2. The level of stock (inventory)
3. The number of firms in the industry
4. Factor substitution
5. The time period

Implications of PES for decision making
Consumers benefit from supply being elastic. This is because it means

that supply is responsive to consumer demand. If demand increases,
price will rise. If supply is elastic, the quantity supplied will rise by a
greater percentage than the change in price. Sales may rise significantly
without there being a large increase in price as shown in Figure 12.6.
Producers want their supply to be as elastic as possible. Their profits will

be higher, the quicker and more fully they can adjust their supply in
response to changes in demand and hence price.
If governments want to encourage the output and consumption of a

product they are likely to be more successful giving a subsidy to
producers if supply is elastic. Governments use a variety of policy
measures to promote flexibility in production, for example a number of
governments have changed the law making it easier for firms to hire and
fire labour.
•Perfectly price elastic supply means that a change in the quantity supplied can happen without the
market price having to increase as the supply can increase without costs increasing.
•Perfectly price inelastic supply means that a change in price has no impact on the quantity supplied
because the supply of the good or service is fixed in the short run.
•Price elastic supply exists if firms can easily increase the supply of a product in the short run following
an increase in the price, i.e., supply is relatively responsive to a change in price.
•Price elasticity of supply (PES) refers to the extent to which the supply of a product changes following
a change in its price.
•Price inelastic supply exists if firms find it difficult, if at all possible, to change supply following a change
in the market price, i.e., supply is relatively unresponsive to a change in price.
•Stocks (or inventories) that are the raw materials, components and finished goods (ready for sale) used
in the production process.
•Unitary price elastic supply means that any percentage change in the price is matched by the same
proportional change in the quantity supplied.

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OBJECTIVES Topics Guidance

By contrast, supply is price inelastic if firms find it difficult to change production

In the above case, the proportional increase in price from

In the case of price elastic supply, the increase in price

If the value of PES for a good or service is equal to 0, then

1. The degree spare capacity

2. The level of stock (inventory)

3. The number of firms in the industry

5. The time period

Consumers benefit from supply being elastic. This is because it means

Producers want their supply to be as elastic as possible. Their profits will

If governments want to encourage the output and consumption of a

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