Price Elasticity of Supply (PES): IB Economics 2.6 notes

What PES measures

Price elasticity of supply (PES) measures how much quantity supplied responds when the price of a good changes. It is the percentage change in quantity supplied divided by the percentage change in price.

Because supply curves slope upward, PES is normally positive: a higher price raises quantity supplied. The size of the number tells you how sensitive producers are. A PES of 0.4 means supply is inelastic (a 10 percent price rise brings only a 4 percent output rise), while a PES of 2.5 means supply is elastic (the same price rise brings a 25 percent output rise).

IB uses the same thresholds as for demand: PES less than 1 is inelastic, PES greater than 1 is elastic, and PES equal to 1 is unit elastic.

The formula and a worked calculation

PES = percentage change in quantity supplied divided by percentage change in price. Always calculate each percentage change from the original value.

Worked example: the price of coffee beans rises from 4.00 to 4.60 per kg, and quantity supplied rises from 200 to 230 tonnes. The price change is 0.60 on a base of 4.00, so %ΔP = 0.60 / 4.00 = 0.15, that is 15 percent. The quantity change is 30 on a base of 200, so %ΔQs = 30 / 200 = 0.15, that is 15 percent.

PES = 15 / 15 = 1. Supply here is unit elastic. If instead quantity had risen only to 212 tonnes, %ΔQs = 12 / 200 = 6 percent, giving PES = 6 / 15 = 0.4, which is inelastic.

Determinants of PES

Time is the most important determinant. Over a longer period firms can adjust all factors of production, hire staff, and build capacity, so supply becomes more elastic the longer the time frame.

Mobility of factors of production: if labour and capital can be switched easily from making one good to another, supply is more elastic. A factory that can retool quickly responds fast to price changes.

Spare (unused) capacity: if a firm has idle machines and workers, it can raise output quickly without rising costs, making supply elastic. A firm already at full capacity has inelastic supply.

Ability to store stocks (inventories): goods that can be stockpiled, such as canned food or coal, have more elastic supply because producers can release stored output when prices rise. Perishable goods cannot be stored, so their supply is more inelastic.

Primary commodities versus manufactures

Primary commodities (agricultural crops, minerals, oil) tend to have inelastic supply. Farmers cannot grow a crop faster when the price rises mid-season, and opening a new mine takes years, so quantity responds slowly to price.

Manufactured goods tend to have more elastic supply. Factories can add shifts, use spare capacity, and switch production lines relatively quickly, so output responds more to price.

This difference matters for the IB key concept of change: because primary product supply is inelastic (and demand is often inelastic too), a small shift in supply or demand causes large price swings. This price volatility is a recurring problem for economies that depend on exporting a few primary commodities, such as Zambia with copper or Ghana with cocoa.

Short run versus long run

In the short run at least one factor of production is fixed, so firms can only expand output by working existing capacity harder. Supply is therefore relatively inelastic.

In the long run all factors are variable. Firms can build new plants, enter or leave the industry, and reallocate resources, so supply is much more elastic. The same price rise brings a far larger output response given enough time.

This is why a supply diagram is sometimes drawn steeper for the short run and flatter for the long run: the passage of time relaxes the constraints that hold quantity supplied down.

Common Paper mistakes

Do not confuse PES with PED. PES uses quantity supplied and is normally positive; a common error is writing the wrong quantity in the numerator.

Do not forget to base each percentage change on the original figure. Calculating from the new value gives the wrong PES.

When asked for determinants, avoid vague answers like 'the economy'. Name specific factors: time, factor mobility, spare capacity, and the ability to hold stocks, and explain each in the context of the good in the question.

How this is examined

• PES appears mainly in Paper 1 part (a) definitions and short explanations, and in Paper 2 data response where you may have to calculate it from a table. Always show the two percentage-change steps before dividing, since method marks are awarded for working.
• When a question asks why primary commodity prices are volatile, the mark scheme rewards linking inelastic supply AND inelastic demand together, not just one of them.
• Use the four determinants (time, factor mobility, spare capacity, stocks) as your structure for any 'explain PES' question, and apply each to the specific good rather than listing them generically.

Key terms

price elasticity of supplyprice elasticity of demandsupply