Interpretation of the significance of the PES value: perfectly inelastic, inelastic, unitary, elastic, perfectly elastic

Price Elasticity of Supply (PES)

Definition (Cambridge 0455 – Unit 2):

PES is the percentage change in the quantity supplied of a good or service that results from a one‑percent change in its price, ceteris paribus.

Formula

The elasticity of supply is calculated as:

\[

Es=\frac{\%\Delta Qs}{\%\Delta P}

\]

  • \(\%\Delta Q_s\) = percentage change in quantity supplied

  • \(\%\Delta P\) = percentage change in price

Mid‑point (arc) method – the method required in the exam

\[

Es=\frac{\dfrac{Q2-Q1}{\dfrac{Q1+Q2}{2}}}{\dfrac{P2-P1}{\dfrac{P1+P_2}{2}}}

\]

Using the midpoint formula gives the same elasticity whether the price rises or falls, which is why it is the preferred method for IGCSE/AS‑Level questions.

Worked example (mid‑point method)

  • Initial price \(P1 = £10\), new price \(P2 = £12\)

  • Initial quantity supplied \(Q1 = 100\), new quantity supplied \(Q2 = 130\)

\[

\%\Delta P=\frac{P2-P1}{\dfrac{P1+P2}{2}}=\frac{12-10}{(10+12)/2}= \frac{2}{11}=0.1818\;(18.2\%)

\]

\[

\%\Delta Qs=\frac{Q2-Q1}{\dfrac{Q1+Q_2}{2}}=\frac{130-100}{(100+130)/2}= \frac{30}{115}=0.2609\;(26.1\%)

\]

\[

E_s=\frac{26.1\%}{18.2\%}=1.44\;\text{(elastic supply)}

\]

Interpreting the PES value

PES value (range)InterpretationQuick‑recall cues (typical characteristics)Illustrative example
0 (exactly)Perfectly inelastic supplyNo spare capacity; quantity cannot be altered regardless of price.Land in a fixed location – the amount of land cannot be increased.
0 < \(E_s\) < 1Inelastic supplyLimited ability to change output; production takes time or inputs are scarce.Perishable crops where the harvest cannot be expanded quickly.
\(E_s = 1\)Unitary elastic supplyPercentage change in quantity supplied equals the percentage change in price.Some manufactured items where firms can increase output at a constant rate.
\(E_s > 1\)Elastic supplySpare capacity or flexible production; quantity supplied changes more than price.Clothing industry – factories can add shifts to meet higher prices.
∞ (infinite)Perfectly elastic supplyAny price rise triggers an unlimited increase in quantity; producers are willing to supply any amount at the given price.Electricity from a large, fully‑interconnected grid where output can be raised instantly.

Main influences on PES (determinants)

The Cambridge syllabus lists six “main influences” on the price elasticity of supply. They are presented here in the order used in the syllabus, each with a brief explanatory note.

  • Time period – In the long run firms can adjust plant, equipment and labour, making supply more elastic.

  • Availability of inputs – Easy access to raw materials, components or labour allows a quicker increase in output.

  • Spare (unused) capacity – Firms operating below full capacity can raise output without large cost increases.

  • Mobility of factors of production – Highly mobile labour (or other factors) can be re‑allocated rapidly, raising elasticity.

  • Nature of the good – Goods that are perishable, require specialised equipment, or are fixed in supply (e.g., land) tend to have inelastic supply.

  • Short‑run vs long‑run – In the short run many inputs are fixed, giving a lower (more inelastic) PES; in the long run they become variable, increasing elasticity.

Why understanding PES matters

  • Predicts how producers will react to price changes caused by taxes, subsidies, or price controls.

  • Helps policymakers assess the likely impact of a policy on market equilibrium and on government revenue.

  • Guides businesses in planning capacity expansion and in deciding whether to enter or exit a market.

Suggested diagram

Draw five supply curves on a single price‑quantity graph to visualise the different slopes:

  • Perfectly inelastic – vertical line

  • Inelastic – steep but downward‑sloping

  • Unitary elastic – curve with a constant percentage change (slope varies)

  • Elastic – flatter downward‑sloping line

  • Perfectly elastic – horizontal line

Label each curve with its corresponding PES range for quick revision.