Cambridge Syllabus Notes

Price Elasticity of Supply (PES)

1. Link to Cambridge Syllabus Key Concepts

PES illustrates how a firm’s marginal decision‑making (the choice of the extra output where marginal revenue = marginal cost) is affected by price changes and the time‑frame available for adjustment. A higher (more elastic) PES means the firm can re‑allocate resources quickly, leading to a more efficient allocation of scarce factors in the market.

2. Definition (AO1)

The price elasticity of supply measures the responsiveness of the quantity supplied of a good to a change in its market price, ceteris paribus. It is expressed as the percentage change in quantity supplied divided by the percentage change in price.

3. Formula & Worked Example (AO1)

$$E_s=\frac{\%\Delta Q_s}{\%\Delta P}$$

$\%\Delta Q_s$ = percentage change in quantity supplied
$\%\Delta P$ = percentage change in price

Numerical example

Price rises from £10 to £11 → $\%\Delta P = \frac{11-10}{10}\times100 = 10\%$
Quantity supplied rises from 1,000 units to 1,150 units → $\%\Delta Q_s = \frac{1,150-1,000}{1,000}\times100 = 15\%$
Elasticity: $E_s = \frac{15\%}{10\%}=1.5$

Because $E_s>1$, supply is **elastic** in this case.

4. Interpretation of the Coefficient (size & sign) (AO2)

Coefficient	Interpretation	Implication for the firm
$E_s > 1$	Elastic supply – quantity supplied changes proportionally more than price.	Firms can increase output quickly when price rises and are less vulnerable to price falls.
$E_s = 1$	Unit‑elastic supply – quantity supplied changes in the same proportion as price.	Revenue is unchanged by a price change (ignoring cost changes).
$0 < E_s < 1$	Inelastic supply – quantity supplied changes proportionally less than price.	Firms cannot adjust output rapidly; profit margins are more sensitive to price movements.
$E_s = 0$	Perfectly inelastic – quantity supplied does not respond to price at all.	Typical of fixed‑supply goods (e.g., unique artworks, land).
$E_s = \infty$	Perfectly elastic – firms are willing to supply any quantity at a given price but none at any other price.	Occurs only in the very short run for highly competitive markets with abundant spare capacity.

For normal supply curves the coefficient is **positive** because a higher price encourages a higher quantity supplied. Negative values are exceptional and are not required for the exam.

5. Determinants of PES and Their Effect on the Speed of Adjustment (AO2)

Determinant	Effect on Elasticity	Effect on Speed of Adjustment	Explanation
Time horizon	Long‑run → more elastic; Short‑run → more inelastic	Long‑run allows quicker, larger adjustments; short‑run limits changes to existing capacity.	In the long run firms can vary all inputs, build new plants, retrain staff, etc.
Spare (unused) capacity	More spare capacity → more elastic	Output can be raised almost immediately.	Under‑utilised plants can increase production without new investment.
Mobility of factors of production	Highly mobile factors → more elastic	Labour or capital can be re‑allocated quickly between products or locations.	Mobile resources reduce the lag between a price change and output response.
Complexity of the production process	Simple, modular processes → more elastic	Changes can be made rapidly with little re‑tooling.	Easy to add or remove production lines.
Stock of inputs (inventories)	Large inventories → more elastic	Firms can draw on stored raw materials and increase output without waiting for deliveries.	Reduces the time lag associated with procurement.
Regulatory & legal constraints	Strict regulations → more inelastic	Licences, quotas, planning permissions or environmental standards delay output changes.	Compliance costs and procedural delays lengthen the adjustment period.
Technology	Flexible, up‑gradable technology → more elastic	Automation and modular equipment cut set‑up time, enabling faster response.	Advanced technology allows rapid scaling up or down.

6. Implications for the Speed and Ease with Which Firms React to Changed Market Conditions (AO2)

Short‑run vs. long‑run adjustment
- Short run: many inputs are fixed → PES low (inelastic). Firms can only vary utilisation of existing capacity, so the response to a price change is slow and limited.
- Long run: all inputs become variable → PES higher (elastic). Firms can build new plants, adopt new technology, or retrain staff, allowing a faster and larger output change.
Spare capacity
- Excess capacity → immediate output increase, high PES.
- Full utilisation → additional output requires capital investment, slowing response and lowering PES.
Factor mobility
- Mobile labour and capital → swift reallocation between products or locations, raising PES.
- Specialised or immobile factors (e.g., skilled artisans, bespoke machinery) constrain rapid changes, making supply inelastic.
Regulatory and technological environment
- Stringent licensing, environmental standards, or technology lock‑ins increase adjustment costs and time → inelastic supply.
- Flexible, modular technology and a light regulatory regime reduce adjustment time → elastic supply.
Strategic consequences for firms
- Firms with elastic supply can exploit price spikes quickly, capture market share and earn higher profits.
- Firms with inelastic supply are less exposed to volatile demand but may suffer larger profit losses when prices fall.

7. Real‑World Illustrative Scenarios (AO3)

Fresh fruit (perishable good): Short growing season, limited storage, labour tied to harvest. PES is low in the short run; a sudden price rise cannot be met quickly.
Steel production: Large plants often have idle capacity and readily available raw material (iron ore, coal). PES is relatively high; firms can increase output promptly when market price rises.
Software‑as‑a‑Service (SaaS): Production is digital, with virtually unlimited capacity once the platform is built. PES is highly elastic even in the short run.
Custom‑made furniture: Skilled craftsmen and bespoke machinery make the production process complex and the factors immobile. PES is low; output adjusts slowly to price changes.

8. Diagram Guidance (AO2)

Teacher’s note: draw the diagram on the exam board sheet or provide a printed copy.

Axes: Price (P) on the vertical axis, Quantity supplied (Q) on the horizontal axis.
Two supply curves:
- SR supply (S_SR) – steep, showing inelastic response in the short run.
- LR supply (S_LR) – flatter, showing a more elastic response in the long run.
Mark an initial equilibrium point (E₁) on S_SR. Show a price increase to P₂ and draw the resulting quantity change:
- Short‑run move to point A on S_SR (small increase in Q).
- Long‑run move to point B on S_LR (larger increase in Q).
Label the arrows, time‑horizon (SR vs LR) and annotate the relative steepness of the curves.

9. Summary

Understanding the price elasticity of supply enables students to predict how quickly and easily firms can respond to changes in market conditions. The key determinants—time horizon, spare capacity, factor mobility, production complexity, input inventories, regulatory environment and technology—shape whether supply is elastic or inelastic, influencing both short‑run and long‑run market dynamics, marginal decision‑making and overall economic efficiency.

10. Suggested Exam Question (AO2/3)

“Explain how the price elasticity of supply influences a firm’s ability to respond to a sudden increase in market price. In your answer, discuss at least three determinants of supply elasticity and illustrate with appropriate real‑world examples.”

implications for speed and ease with which firms react to changed market conditions