Price Elasticity Of Supply (Extra)

CIE IGCSE Economics 2.8 Price Elasticity of Supply (PES) Contents 2.8.1 Calculation, Determinants & Significance of PES Page 1 of 6 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers Your notes Head to www.savemyexams.com for more awesome resources 2.8.1 Calculation, Determinants & Significance of PES The Definition & Calculation of PES The law of supply states that when there is an increase in price (ceteris paribus), producers will increase the quantity supplied & 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 PES = % change in quantity supplied % △ in QS = % change in price % △in P To calculate a % change, use the following formula % Change = new value − old value × 100 old value Worked example In recent months, the price of avocados has increased from £0.90 to £1.45. Bewdley Farm Shop in Wales have 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 & explain one reason for the value Step 1: Calculate the % change in QS % △ QS = 120 − 110 × 100 110 % △ QS = 9. 1 % Step 2: Calculate the % change in P Page 2 of 6 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers Your notes Head to www.savemyexams.com for more awesome resources %△P = 1. 45 − 0. 90 x 100 0. 90 Your notes % △ P = 61 % Step 3: Insert the above values in the PES formula PE S = % △ in QS % △in P PE S = 9. 1 % 61 % 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 Examiner Tip When doing elasticity calculations make sure that your final answer is not expressed as a percentage. This is a common error and loses marks. Interpreting PES Values The Values of PES Vary From 0 To Infinity (∞) & They Are Classified As Follows Value 0 Name Explanation Perfectly Inelastic The QS is completely unresponsive to a change in P (e.g. fixed number of seats in a theatre) Diagram Page 3 of 6 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers Head to www.savemyexams.com for more awesome resources Your notes 0→1 Relatively Inelastic The %∆ in QS is less than proportional to the %∆ in P (e.g agricultural products) 1→ ∞ Relatively Elastic The %∆ in QS is more than proportional to the %∆ in P (e.g t-shirts) ∞ Perfectly Elastic The %∆ in QS will fall to zero with any %∆ in P. However, supply is unlimited at a particular price. This is a very theoretical scenario 1 Unitary Elasticity Any supply curve that starts at the origin (e.g. S1, S2 or S3) has a PES value equal to 1. The %∆ Page 4 of 6 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers Head to www.savemyexams.com for more awesome resources in P = %∆ in QS Your notes The Determinants of PES Some products are more responsive to changes in prices than other products The factors that determine the responsiveness are called the determinants of PES & include: Mobility of the factors of production: if producers can quickly switch their resources between products, then the PES will be more elastic. For example, if prices of hiking boots increase & shoe manufacturers can switch resources from producing trainers to boots, then boots will be price elastic in supply Availability of raw materials: if raw materials are scarce then PES will be low (inelastic). If they are abundant, PES will be higher (elastic) Ability to store goods: if products can be easily stored then PES will be higher (elastic) as producers can quickly increase supply (for example, tinned food products). An inability to store products results in lower PES (inelastic) Spare capacity: if prices increase for a product & there is capacity to produce more in the factories that make those products, then supply will be elastic. If there is no spare capacity to increase production, then supply will be inelastic Time period: In the short run, producers may find it harder to respond to an increase in prices as it takes time to produce the product (e.g., avocados). However, in the long run they can change any of their factors of production so as to produce more Examiner Tip Many students confuse PES with PED and inadvertently answer questions using knowledge from PED. When faced with PES questions, tell yourself to think like a producer (and not a consumer!) and it will help you to stay focused on providing the correct answer. Page 5 of 6 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers Head to www.savemyexams.com for more awesome resources The Significance of PES for Stakeholders If producers have a high PES (elastic) then they are able to respond to increases in price very quickly This is desirable as it means producers can increase revenues & profits if they can supply more Firms can increase their PES by: Creating more spare capacity on their production lines Maintaining larger inventories Using more modern technology If producers have a low PES (inelastic) then they are less able to respond to increases in price This shortage in supply will mean that prices continue to rise, possibly causing inflation in the economy Governments are very interested in the PES of key markets in the economy as they want to ensure that these markets can respond quickly to rising demand One e.g is the housing market. If the PES of housing is low (inelastic), property prices will become unaffordable with any increase in demand Another e.g. is the labour market. If the PES of labour is low (inelastic) then production costs of firms will rise quickly during periods of increasing demand when firms need to hire additional workers Page 6 of 6 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers Your notes