Definition of PES

Published by Patrick Mutisya · 14 days ago

Cambridge IGCSE Economics 0455 – Price Elasticity of Supply (PES)

The Allocation of Resources – Price Elasticity of Supply (PES)

Objective

Define the price elasticity of supply (PES) and understand its significance in the allocation of resources.

Definition of PES

The price elasticity of supply (PES) measures the responsiveness of the quantity of a good or service that producers are willing and able to supply when its market price changes.

Mathematically, PES is expressed as:

\$\text{PES} = \frac{\%\Delta Q_s}{\%\Delta P}\$

where:

  • \$\%\Delta Q_s\$ = percentage change in quantity supplied

  • \$\%\Delta P\$ = percentage change in price

Interpretation of PES \cdot alues

  1. PES > 1 (Elastic Supply): Quantity supplied changes proportionally more than the price change.

  2. PES = 1 (Unitary Elastic Supply): Quantity supplied changes by the same proportion as the price change.

  3. PES < 1 (Inelastic Supply): Quantity supplied changes proportionally less than the price change.

  4. PES = 0 (Perfectly Inelastic Supply): Quantity supplied does not respond to price changes.

  5. PES = ∞ (Perfectly Elastic Supply): Producers are willing to supply any quantity at a particular price, but none at any other price.

Factors Influencing PES

FactorEffect on PESExplanation
Time HorizonLong‑run > Short‑runProducers have more time to adjust production processes, hire labour, or acquire new technology.
Availability of InputsMore inputs → Higher PESWhen raw materials, labour, or capital are readily available, firms can increase output more easily.
Spare CapacityHigher spare capacity → Higher PESFirms operating below full capacity can raise output quickly without major cost increases.
Mobility of Factors of ProductionGreater mobility → Higher PESIf labour and capital can move between industries, supply can adjust faster to price changes.
Nature of the GoodPerishable or seasonal goods often have lower PESProduction cannot be stored or quickly expanded for such goods.

Why PES Matters in Resource Allocation

Understanding PES helps economists and policymakers predict how changes in market conditions (e.g., taxes, subsidies, price floors) will affect the quantity of goods supplied, which in turn influences the efficient allocation of scarce resources.

Suggested diagram: A graph showing three supply curves – perfectly inelastic (vertical), unitary elastic (45°), and perfectly elastic (horizontal) – with price on the vertical axis and quantity on the horizontal axis.