Calculation, Determinants &
Significance of PES
The Definition and 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
o Economists are interested in 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
o The responsiveness is different for different types of products
Calculation of PES
PES can be calculated using the following formula
Worked Example
In recent months, the price of avocados has increased from £0.90 to
£1.45. Bewdley Farm Shop in Wales have sought to maximise their profits by
increasing the quantity supplied to market. They have been able to increase the
supply of avocados from 110 units a week to 120 units a week. Calculate the PES of
avocados and explain one reason for the value
Interpreting PES values
The Values of PES Vary From 0 to Infinity (∞) and They Are Classified As
Follows
Name Explanation
Perfectly inelastic
Value = 0
The QS
is completely
unresponsive t
o a change in P
o E.g.
Fixed
number
of seats
in a
theatre
Relatively inelastic
Value = 0→1
The %∆ in QS
is less
than proportio
nal to the %∆
in P
o E.g
Agricul
tural
product
s
The %∆ in QS
is more
Relatively elastic than proportio
nal to the %∆
Value = 1 → ∞ in P
o E.g T-
shirts
Perfectly elastic
Value = ∞ The %∆ in QS
will fall to
zero with any
%∆ in P
o Supply
is
unlimit
ed at a
particul
ar price
o This is
a very
theoreti
cal
scenari
o
Any supply
curve that
starts at the
origin
o E.g. S1,
Unitary elasticity
S2 or
S3 have
Value = 1
a PES
value
equal to
1
o The %
∆ in P
= %∆
in QS
The Determinants of PES
Some products are more responsive to changes in prices than other
products
The factors that determine responsiveness are called the determinants of
PES and include:
o Mobility of the factors of production
If producers can quickly switch their resources between products,
then the PES will be more elastic. For example, 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
o Availability of raw materials
If raw materials are scarce, then PES will be low (inelastic). If they are
abundant, PES will be higher (elastic)
o Ability to store goods
If products can be easily stored, then PES will be higher (elastic) as
producers can quickly increase supply (for example, tinned food
products). An inability to store products results in lower PES (inelastic)
o Spare capacity
If prices increase for a product and there is 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
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
The Significance of PES for
Stakeholders
If producers have a high PES (elastic), then they are able to respond to
increases in price very quickly
o This is desirable as it means producers can increase revenues and
profits if they can supply more
o Firms can increase their PES by:
Creating more spare capacity on their production lines
Maintaining larger inventories
Using more modern technology
If producers have a low PES (inelastic) then they are less able to respond to
increases in price
o This shortage in supply will mean that prices continue to rise, possibly
causing inflation in the economy
Governments are very interested in the PES of key markets in the economy
as they want to ensure that these markets can respond quickly to rising
demand
o One example is the housing market
If the PES of housing is low (inelastic), property prices will
become unaffordable with any increase in demand
o Another example is the labour market
If the PES of labour is low (inelastic) then production costs of
firms will rise quickly during periods of increasing demand when
firms need to hire additional workers
o factors of production so as to produce more