Cambridge Notes, Past Papers, Revision Questions

Price Elasticity of Supply (PES)

1. Definition

The price elasticity of supply measures how responsive the quantity supplied of a good or service is to a change in its price.

2. Formula (unit‑less)

E_s \;=\; \frac{\%\;\text{change in quantity supplied}}{\%\;\text{change in price}}

\;=\;

\frac{\displaystyle\frac{\Delta Qs}{Qs}}{\displaystyle\frac{\Delta P}{P}}

where

\(\Delta Q_s\) = change in quantity supplied

\(Q_s\) = original quantity supplied

\(\Delta P\) = change in price

\(P\) = original price

Because the numerator and denominator are both percentages, the result is a pure number (no units).

3. Worked numeric example

Price rises from £10 to £12 and quantity supplied rises from 100 units to 130 units.

Percentage change in price
\[
\frac{12-10}{10}\times100\% = 20\%
\]

Percentage change in quantity supplied
\[
\frac{130-100}{100}\times100\% = 30\%
\]

Elasticity
\[
E_s = \frac{30\%}{20\%}=1.5
\]

Since \(E_s = 1.5 > 1\), supply is elastic – producers respond strongly to the price increase.

4. Interpretation of the PES value

Value of \(E_s\)	Elasticity description	Typical market behaviour
\(E_s = 0\)	Perfectly inelastic supply	Quantity supplied does not change regardless of price (e.g., a unique artwork).
\(0 < E_s < 1\)	Inelastic supply	Quantity supplied changes, but proportionally less than price (e.g., short‑run agricultural output).
\(E_s = 1\)	Unit‑elastic supply	Percentage change in quantity supplied equals percentage change in price.
\(E_s > 1\)	Elastic supply	Quantity supplied changes more than proportionally to price (e.g., manufactured goods with spare capacity).
\(E_s = \infty\)	Perfectly elastic supply	Any price above a minimum induces an unlimited quantity supplied (theoretical case).

5. Main influences on whether supply is elastic or inelastic

These six determinants are taken directly from the Cambridge IGCSE 0455 syllabus (Section 2.7) and are presented in the order required by the syllabus.

Time period
- Short‑run*: firms have limited ability to vary plant size, labour or raw‑material stocks → supply tends to be inelastic.
- Long‑run*: firms can adjust plant size, adopt new technology, enter or exit the market → supply becomes more elastic.

Availability of inputs
Readily available inputs (e.g., abundant raw materials) make it easier to increase output → more elastic.
Scarce or specialised inputs (e.g., rare minerals, highly specialised components) restrict output adjustments → more inelastic.

Mobility of factors of production
Labour and capital that can be re‑allocated quickly between uses → elastic supply.
Immobilised factors (e.g., fixed land, highly specialised machinery) limit responsiveness → inelastic supply.

Spare (excess) capacity
Firms operating below capacity can raise output without major cost increases → elastic.
Firms already at full capacity need new investment to raise output → inelastic.

Nature of the good
Perishable goods or those produced in large, seasonal batches (e.g., fresh fruit) often have inelastic supply in the short run.
Standardised, mass‑produced goods (e.g., smartphones, clothing) can be scaled up quickly → more elastic.

Regulatory and institutional factors
Licences, quotas, strict environmental rules or price controls constrain output changes → inelastic.
Liberal trade policies, low entry barriers and minimal regulation facilitate rapid adjustments → elastic.

6. Significance of PES

Producers:
When supply is elastic, a price rise leads to a relatively large increase in output, affecting total revenue and the ability to cover fixed costs.
When supply is inelastic, output cannot be expanded quickly, so a price rise may increase revenue but can also lead to shortages.

Consumers:
Elastic supply tends to moderate price increases because quantity can rise rapidly, protecting consumer welfare.
Inelastic supply can cause sharp price spikes when demand rises, reducing consumer surplus.

Government and policy:
Understanding PES helps predict the incidence of taxes or subsidies – with elastic supply, producers bear most of a tax burden; with inelastic supply, consumers bear more.
For price‑control measures (e.g., ceilings or floors), the elasticity of supply determines the size of any resulting surplus or shortage.

7. Summary table of determinants

Determinant	Effect on elasticity	Typical example
Time period	Long‑run → more elastic; Short‑run → more inelastic	Expanding a car factory over several years vs. reacting to a sudden price rise in the same year
Availability of inputs	Abundant inputs → elastic; Scarce inputs → inelastic	Oil extraction when global reserves are plentiful vs. extraction of rare‑earth minerals
Mobility of factors	High mobility (labour & capital) → elastic; Low mobility → inelastic	Seasonal agricultural labour moving between farms vs. specialised aerospace engineers
Spare capacity	Excess capacity → elastic; No spare capacity → inelastic	Textile mill operating at 60 % utilisation vs. a steel plant at 100 % utilisation
Nature of the good	Standardised, mass‑produced → elastic; Perishable or batch‑produced → inelastic	Smartphones vs. fresh strawberries
Regulatory/Institutional factors	Fewer restrictions → elastic; Strict regulations → inelastic	Open‑entry retail market vs. licensed taxi services

8. Suggested diagram

Draw two supply curves on the same set of axes (price on the vertical axis, quantity on the horizontal axis):

Elastic supply curve – relatively flat, showing a large change in quantity for a small change in price.

Inelastic supply curve – steep, showing a small change in quantity for the same price change.

Label each curve, indicate a price change with arrows, and note the differing movements in quantity supplied.

Main influences on whether supply is elastic or inelastic