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SL IB Economics

Revision Notes

Home / IB / Economics / SL / Revision Notes / 2. Microeconomics / 2.6 Price Elasticity of Supply (PES) / 2.6.1 Definition, Calculation & Determinants of PES


2.6.1 Definition, Calculation & Determinants of PES


The Definition & Calculation of PES

  • The law of supply states that when there is an increase in price (ceteris paribus), producers will increase the quantity supplied and vice versa
    • Economists are interested by how much the quantity supplied will increase
  • Price elasticity of supply (PES) reveals how responsive the change in quantity supplied is to a change in price
    • The responsiveness is different for different types of products

Calculation of PES

  • PES can be calculated using the following formula

text PES =  end text fraction numerator percent sign space change space in space quantity space supplied over denominator percent sign space change space in space price end fraction space equals space fraction numerator percent sign triangle space in thin space QS over denominator percent sign triangle in space straight P end fraction

 

  • To calculate a % change, use the following formula

percent sign space Change space equals space fraction numerator new space value space minus space old space value over denominator old space value end fraction space cross times space 100 

Worked Example

In recent months, the price of avocados has increased from AU$ 0.90 to AU$ 1.45. Bewdley Farm Shop in Margaret River has sought to maximise their profits by increasing the quantity supplied to the market. They have been able to increase sales from 110 units a week to 120 units a week. Calculate the PES of avocados and explain one reason for the value  [4]

Step 1:  Calculate the % change in QS

  percent sign triangle Q S space equals space fraction numerator 120 minus 110 over denominator 110 end fraction space cross times 100

percent sign triangle Q S space equals space 9.1 percent sign 


Step 2: Calculate the % change in P

percent sign triangle straight P space equals space fraction numerator 1.45 space minus space 0.90 over denominator 0.90 end fraction space straight x space 100

percent sign triangle straight P space equals space 61 percent sign


Step 3: Insert the above values in the PES formula

PE S space equals space fraction numerator percent sign triangle space in thin space Q S over denominator percent sign triangle in space straight P end fraction

PE S space equals space fraction numerator 9.1 percent sign over denominator 61 percent sign end fraction

PE S space equals space space 0.15

(Two marks for the correct answer or 1 mark for any correct working)

Step 4: Explain one reason for the value

The PES value of 0.15 indicates that avocados are very price inelastic in supply [1]. Even with a significant increase in price, suppliers are unable to supply more likely due to the time it takes to grow additional avocados [1]

Exam Tip

When doing elasticity calculations make sure that your final answer for YED is not expressed as a percentage. This is a common error and loses marks.

In Paper 2 you are occasionally given the PED value and the %Δ in QD. You are then asked to calculate the %Δ in price. Follow the standard math procedure as follows:

1. Substitute the values provided into the equation

2. Substitute X for %Δ in price

3. Solve for X

For these calculations, ensure your final answer is in the correct unit (% or currency) and round your final answer to two decimal places

Interpreting PES Values

The Values of PES vary from 0 to Infinity (∞) & they are Classified as Follows


Value


Name


Explanation

0  Perfectly Inelastic  The QS is completely unresponsive to a
change in P (e.g. fixed number of seats in a theatre)
0→1 Relatively Inelastic The %∆ in QS is less than proportional
to the %∆ in P (e.g agricultural products)
1→ ∞ Relatively Elastic The %∆ in QS is more than proportional
to the %∆ in P (e.g t-shirts)
∞ Perfectly Elastic The %∆ in QS will fall to zero with any %∆ in P. However, supply is unlimited at a particular price. This is a very theoretical scenario

The Determinants of PES

  • Some products are more responsive to changes in prices than other products

  • The factors that determine the responsiveness are called the determinants of PES and include:
  1. Mobility of the factors of production
    If producers can quickly switch their resources between products, then the PES will be more elastic. E.g. If prices of hiking boots increase and shoe manufacturers can switch resources from producing trainers to boots, then boots will be price elastic in supply

  2. The rate at which costs of production increase
    It costs more to produce each additional unit of output (marginal cost). If the rate of the marginal cost increase is low, the quantity supplied will be more elastic. However, if marginal costs rise quickly, then the quantity supplied will be more inelastic

  3. Ability to store goods
    If products can be easily stored then PES will be higher (elastic) as producers can quickly increase supply (e.g. tinned food products). An inability to store products results in lower PES (inelastic)

  4. Spare capacity
    if prices increase for a product and there is a capacity to produce more in the factories that make those products, then supply will be elastic. If there is no spare capacity to increase production, then supply will be inelastic

  5. Time period
    In the short run, producers may find it harder to respond to an increase in prices as it takes time to produce the product (e.g. avocados). However, in the long run they can change any of their factors of production so as to produce more

Exam Tip

Many students confuse PES with PED and inadvertently answer questions using knowledge from PED. When faced with PES questions, tell yourself to think like a producer (not a consumer!) and it will help you to stay focused on providing the correct answer.



  • 1. Introduction To Economics
    • 1.1 What Is Economics?
      • 1.1.1 Economics as a Social Science
        • 1.1.2 The Problem of Choice
          • 1.1.3 The Production Possibilities Curve Model (PPC)
            • 1.1.4 Modelling the Economy
            • 1.2 How Do Economists Approach The World?
              • 1.2.1 Economic Methodology
                • 1.2.2 Economic Thought
              • 2. Microeconomics
                • 2.1 Demand
                  • 2.1.1 Demand, Price & Quantity
                    • 2.1.2 Non-Price Determinants of Demand
                    • 2.2 Supply
                      • 2.2.1 Supply, Price & Quantity
                        • 2.2.2 Non-Price Determinants of Supply
                        • 2.3 Competitive Market Equilibrium
                          • 2.3.1 Market Equilibrium & Disequilibrium
                            • 2.3.2 Functions of the Price Mechanism
                              • 2.3.3 Consumer & Producer Surplus
                              • 2.4 Price Elasticity of Demand (PED)
                                • 2.4.1 Definition, Calculation & Determinants of PED
                                  • 2.4.2 The Significance of PED
                                  • 2.5 Income Elasticity of Demand (YED)
                                    • 2.5.1 Definition, Calculation & Illustration of YED
                                    • 2.6 Price Elasticity of Supply (PES)
                                      • 2.6.1 Definition, Calculation & Determinants of PES
                                      • 2.7 Role of Government In Microeconomics
                                        • 2.7.1 Reasons For Government Intervention In Markets
                                          • 2.7.2 Government Intervention: Indirect Taxes & Subsidies
                                            • 2.7.3 Government Intervention: Price Controls, Direct Provision & Regulation
                                            • 2.8 Market Failure: Externalities & Common Pool (Access) Resources
                                              • 2.8.1 Market Failure
                                                • 2.8.2 Negative Externalities
                                                  • 2.8.3 Positive Externalities
                                                    • 2.8.4 Common Pool (Access) Resources
                                                      • 2.8.5 Government Intervention to Address the Market Failure
                                                        • 2.8.6 Other Interventions to Address the Market Failure
                                                        • 2.9 Market Failure: Public Goods
                                                          • 2.9.1 Public Goods
                                                        • 3. Macroeconomics
                                                          • 3.1 Measuring Economic Activity
                                                            • 3.1.1 National Income & The Circular Flow of Income
                                                              • 3.1.2 National Income Terminology & Calculations
                                                                • 3.1.3 The Business Cycle
                                                                  • 3.1.4 Appropriateness of Using GDP/GNI to Measure Well-being
                                                                    • 3.1.5 Alternative Measures of Well-Being
                                                                    • 3.2 Variations in Economic Activity (AD & AS)
                                                                      • 3.2.1 Aggregate Demand (AD)
                                                                        • 3.2.2 Short-Run Aggregate Supply (SRAS)
                                                                          • 3.2.3 Alternative Views of Aggregate Supply (AS)
                                                                            • 3.2.4 Shifts of the Long-Run Aggregate Supply (LRAS)
                                                                              • 3.2.5 Macroeconomic Equilibrium
                                                                              • 3.3 Macroeconomic Objectives
                                                                                • 3.3.1 An Introduction to Macroeconomic Objectives
                                                                                  • 3.3.2 Economic Growth
                                                                                    • 3.3.3 Low Unemployment
                                                                                      • 3.3.4 Low & Stable Rate of Inflation
                                                                                        • 3.3.5 Potential Conflicts Between Macroeconomic Objectives
                                                                                        • 3.4 Inequality & Poverty
                                                                                          • 3.4.1 Measuring Inequality & Poverty
                                                                                            • 3.4.2 Causes of Inequality & Poverty
                                                                                              • 3.4.3 Using Taxation to Reduce Inequality & Poverty
                                                                                                • 3.4.4 Other Policies to Reduce Inequality & Poverty
                                                                                                • 3.5 Demand Management: Monetary Policy
                                                                                                  • 3.5.1 An Overview of Monetary Policy
                                                                                                  • 3.6 Demand Management: Fiscal Policy
                                                                                                    • 3.6.1 An Overview of Fiscal Policy
                                                                                                    • 3.7 Supply-Side Policies
                                                                                                      • 3.7.1 An Overview of Supply-Side Policies
                                                                                                        • 3.7.2 The Effectiveness of Supply-Side Policies
                                                                                                      • 4. The Global Economy
                                                                                                        • 4.1 Benefits of International Trade
                                                                                                          • 4.1.1 The Advantages of Free Trade
                                                                                                          • 4.2 Types of Trade Protection
                                                                                                            • 4.2.1 Tariffs
                                                                                                              • 4.2.2 Quotas
                                                                                                                • 4.2.3 Export Subsidies
                                                                                                                  • 4.2.4 Administrative Barriers
                                                                                                                  • 4.3 Arguments For & Against Trade Protection
                                                                                                                    • 4.3.1 Arguments For & Against Trade Protection
                                                                                                                    • 4.4 Economic Integration
                                                                                                                      • 4.4.1 Understanding Economic Integration
                                                                                                                        • 4.4.2 Types of Trading Blocs
                                                                                                                          • 4.4.3 The World Trade Organisation (WTO)
                                                                                                                          • 4.5 Exchange Rates
                                                                                                                            • 4.5.1 Types of Exchange Rate Systems
                                                                                                                              • 4.5.2 Causes & Consequences of Exchange Rate Fluctuations
                                                                                                                              • 4.6 Balance of Payments
                                                                                                                                • 4.6.1 Components of the Balance of Payments
                                                                                                                                • 4.7 Sustainable Development
                                                                                                                                  • 4.7.1 The Sustainable Development Goals
                                                                                                                                  • 4.8 Measuring Economic Development
                                                                                                                                    • 4.8.1 Single Indicators of Development
                                                                                                                                      • 4.8.2 Composite Indicators of Development
                                                                                                                                        • 4.8.3 Evaluating the Different Approaches
                                                                                                                                        • 4.9 Barriers to Economic Growth & Development
                                                                                                                                          • 4.9.1 Poverty Traps
                                                                                                                                            • 4.9.2 Economic, Political & Social Barriers
                                                                                                                                            • 4.10 Economic Growth & Development Strategies
                                                                                                                                              • 4.10.1 Trade Strategies, Diversification & Social Enterprise
                                                                                                                                                • 4.10.2 Market-Based & Interventionist Policies
                                                                                                                                                  • 4.10.3 Merit Goods & Inward Foreign Direct Investment
                                                                                                                                                    • 4.10.4 Foreign Aid & Development Assistance
                                                                                                                                                      • 4.10.5 Institutional Change
                                                                                                                                                        • 4.10.6 Evaluating Market Orientated Approaches Versus Government Intervention
                                                                                                                                                          • 4.10.7 Progress Towards Sustainable Development Goals

                                                                                                                                                        Author: Steve



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