Cambridge IGCSE Economics 0455 – Price Elasticity of Supply (PES)Price Elasticity of Supply (PES)
1. Definition
The price elasticity of supply measures the responsiveness of the quantity supplied of a good to a change in its price, ceteris paribus.
2. Formula
The standard formula for PES is:
\$\text{PES} = \frac{\%\ \text{change in quantity supplied}}{\%\ \text{change in price}}\$
In algebraic terms, using initial and new values:
\$\text{PES} = \frac{\dfrac{Q2 - Q1}{Q1}}{\dfrac{P2 - P1}{P1}} = \frac{(Q2 - Q1) \times P1}{(P2 - P1) \times Q1}\$
Where:
- \(Q_1\) = initial quantity supplied
- \(Q_2\) = new quantity supplied
- \(P_1\) = initial price
- \(P_2\) = new price
3. Steps for Calculation
- Identify the initial and new price and quantity supplied.
- Calculate the change in quantity supplied \((Q2 - Q1)\) and the change in price \((P2 - P1)\).
- Compute the percentage changes:
- \(\%\Delta Q = \dfrac{Q2 - Q1}{Q_1} \times 100\)
- \(\%\Delta P = \dfrac{P2 - P1}{P_1} \times 100\)
- Divide \(\%\Delta Q\) by \(\%\Delta P\) to obtain PES.
- Interpret the result:
- PES > 1 : supply is elastic.
- PES = 1 : supply is unit‑elastic.
- PES < 1 : supply is inelastic.
4. Worked Example
Suppose the price of wheat rises from \$200 per tonne to \$250 per tonne. The quantity supplied increases from 1,000 tonnes to 1,300 tonnes.
| Variable | Initial (1) | New (2) |
|---|
| Price (\(P\)) | $200 | $250 |
| Quantity Supplied (\(Q\)) | 1,000 tonnes | 1,300 tonnes |
Calculate the percentage changes:
\$\%\Delta Q = \frac{1,300 - 1,000}{1,000}\times 100 = 30\%\$
\$\%\Delta P = \frac{250 - 200}{200}\times 100 = 25\%\$
Now compute PES:
\$\text{PES} = \frac{30\%}{25\%} = 1.2\$
Interpretation: Since PES = 1.2 > 1, the supply of wheat is elastic in this price range.
5. Factors Influencing PES
- Time period: Supply is more elastic in the long run because producers can adjust plant size, technology, and input use.
- Availability of inputs: If inputs are readily available, firms can increase output quickly, leading to higher PES.
- Spare production capacity: Firms operating below capacity can raise output without large cost increases.
- Mobility of factors of production: Easy movement of labour and capital between industries raises PES.
- Nature of the good: Perishable or highly specialized goods often have lower PES.
6. Summary Table
| PES \cdot alue | Supply Response | Typical Situations |
|---|
| > 1 | Elastic – large change in quantity supplied for a given price change | Long‑run, excess capacity, many substitutes for inputs |
| = 1 | Unit‑elastic – proportional change | Short‑run with moderate flexibility |
| < 1 | Inelastic – small change in quantity supplied for a given price change | Very short‑run, limited inputs, specialized production |
7. Suggested Diagram
Suggested diagram: A supply curve with two points (P₁,Q₁) and (P₂,Q₂) illustrating the calculation of PES using the slope method.
8. Quick Revision Questions
- Define price elasticity of supply.
- Explain why PES is usually higher in the long run than in the short run.
- Calculate PES given: \(P1 = £50\), \(P2 = £55\), \(Q1 = 200\) units, \(Q2 = 230\) units.
- Interpret a PES of 0.4 for a particular product.