# Price elasticity of supply

> CIE A-Level Economics · Unit 2: The Price System and the Microeconomy
> Source: https://www.owlsprep.com/study/cie-9708-u2-price-elasticity-of-supply/

This module explains how responsive quantity supplied is to changes in market price. You will learn to calculate, interpret, and apply price elasticity of supply (PES) to analyse market changes and government policies.

**Prerequisites:** [Supply and demand analysis](https://www.owlsprep.com/study/cie-9708-u2-supply-and-demand/); Basic elasticity concepts

## Learning objectives

- Calculate price elasticity of supply (PES) using the standard formula
- Interpret PES values and categorise different types of supply elasticity
- Explain the key factors that influence PES for different goods and services
- Apply PES analysis to evaluate market outcomes and government policies

## Definition and Calculation of PES

**Price Elasticity of Supply** — A measure of the sensitivity of quantity supplied of a good to a change in its own price, holding all other factors constant.

*Notation:* PES

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

**Worked example:** When the price of wheat increases from \$3 per bushel to \$3.60 per bushel, weekly quantity supplied increases from 5000 bushels to 5600 bushels. Calculate PES.

1. Step 1: Calculate percentage change in quantity supplied:

   $$\frac{5600 - 5000}{5000} \times 100 = 12\%$$
2. Step 2: Calculate percentage change in price:

   $$\frac{3.60 - 3.00}{3.00} \times 100 = 20\%$$
3. Step 3: Substitute into the PES formula:

   $$PES = \frac{12\%}{20\%} = 0.6$$

> **tip**
>
> CIE accepts both the simple percentage method and the midpoint (arc elasticity) method unless the question explicitly specifies otherwise.

## Interpreting PES Values

PES is always positive, because the law of supply states that price and quantity supplied move in the same direction. The value of PES tells us how responsive supply is to price changes:

| PES Value | Elasticity Category | Description |
| --- | --- | --- |
| = 0 | Perfectly inelastic | Quantity supplied does not change |
| 0 < PES < 1 | Inelastic | Smaller % change in Qs than P |
| = 1 | Unit elastic | Equal % change in Qs and P |
| > 1 | Elastic | Larger % change in Qs than P |
| = ∞ | Perfectly elastic | Any quantity supplied at current price |

**Worked example:** A rare original Picasso painting is being sold at auction. What is the PES of this painting?

1. Step 1: There is only one copy of the painting in existence, so quantity supplied is fixed no matter what price buyers offer.
2. Step 2: The percentage change in quantity supplied is 0% for any change in price.
3. Step 3: $PES = \frac{0\%}{\%\Delta P} = 0$, so supply is perfectly inelastic.

> **Exam tip**
>
> Never write that PES can be negative in an exam – this is a common mistake from confusing PES with price elasticity of demand.

## Determinants of PES

PES depends on how easily producers can adjust their level of output in response to a price change. The key factors are:

- **Time period**: Supply is more inelastic in the short run, as producers cannot easily change output; it becomes more elastic in the long run as capacity can be adjusted.
- **Factor mobility**: If factors of production can be easily switched into this market from other uses, supply is more elastic.
- **Spare capacity**: If a firm has unused labour and capital, it can increase output quickly, so supply is more elastic.
- **Storability**: If finished goods can be stored easily, firms can draw on inventory to increase supply when price rises, making PES more elastic.

**Worked example:** Explain why PES is lower for fresh milk than for bottled soft drinks in the short run.

1. 1. Fresh milk is perishable and cannot be stored for long periods, so firms cannot draw on existing stocks to increase supply when price rises.
2. 2. Output of fresh milk cannot be increased quickly – it takes time to raise more dairy cows and increase production.
3. 3. Bottled soft drinks can be stored easily, and factories can increase production quickly if they have spare capacity. Therefore PES of fresh milk is lower (more inelastic) than PES of soft drinks.

## Applications of PES

PES helps predict how shifts in demand will affect equilibrium price and quantity, and who bears the burden of an indirect tax. If supply is inelastic, an increase in demand leads to a large rise in price and only a small rise in quantity. If supply is elastic, the opposite is true.

**Worked example:** The government adds an indirect tax to cigarettes. If supply of cigarettes is elastic, will producers or consumers bear most of the tax burden?

1. 1. An indirect tax reduces the price producers receive after tax. If supply is elastic, producers are very responsive to a fall in price.
2. 2. Producers will cut output significantly, pushing the pre-tax price up. Most of the tax is passed to consumers as a higher retail price.
3. 3. If PES is higher (more elastic), a larger share of the tax burden falls on consumers, which matches this outcome.

> **tip**
>
> In CIE essay questions, always draw a supply and demand diagram to illustrate your PES analysis – this will get you extra marks for clear communication.

## Common pitfalls

- **Wrong:** Claiming PES can be a negative number
  - Why it fails: Confusing PES with price elasticity of demand, which is usually negative
  - Correct: Always remember PES is positive, because the law of supply means price and quantity supplied move in the same direction
- **Wrong:** Swapping numerator and denominator in the PES formula
  - Why it fails: Mixing up percentage changes of quantity and price
  - Correct: Remember: PES (like PED) is always quantity over price: *% change quantity divided by % change price*
- **Wrong:** Confusing determinants of PES with determinants of PED
  - Why it fails: Mixing up demand-side and supply-side factors that influence elasticity
  - Correct: Focus PES explanations on producer ability to change output, not consumer substitutes or income
- **Wrong:** Claiming agricultural supply is elastic in the short run
  - Why it fails: Forgetting that crops and livestock take time to produce
  - Correct: Always note that agricultural supply is inelastic in the short run and only becomes elastic in the long run

## Cheatsheet

| PES Value | Type | Key Feature |
| --- | --- | --- |
| PES = 0 | Perfectly inelastic | Fixed quantity (e.g. rare art) |
| 0 < PES < 1 | Inelastic | Short run, perishable goods |
| PES = 1 | Unit elastic | Supply curve through origin |
| PES > 1 | Elastic | Long run, spare capacity, storable |
| PES = ∞ | Perfectly elastic | Constant cost production |

## What's next

Mastering PES completes your foundation in core elasticity concepts, which are essential for all further microeconomic analysis in CIE A-Level Economics. PES is regularly tested alongside price elasticity of demand in both multiple choice and longer answer questions, and it is critical for explaining outcomes from government intervention like taxes, subsidies and price controls. You can now apply your understanding of PES to these policy topics, to build interconnected knowledge that helps you score full marks in extended response questions.

- [Consumer Surplus](https://www.owlsprep.com/study/cie-9708-u2-consumer-surplus/)
- [Producer Surplus](https://www.owlsprep.com/study/cie-9708-u2-producer-surplus/)
- [Costs, Revenue and Profit: Short Run vs Long Run](https://www.owlsprep.com/study/cie-9708-u2-costs-revenue-and-profit-short/)

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