📏 Perfectly inelastic
Draw a straight vertical line up from the quantity axis and label it S. When the price rises from P1 to P2, quantity stays at Q1.
Price Elasticity of Supply » Price Elasticity of Supply
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 2.7.1, 2.7.2, 2.7.3
- What price elasticity of supply (PES) means and how to calculate it
- How to interpret PES values from perfectly inelastic to perfectly elastic
- How to draw the supply curve for each type of PES
- The main determinants of PES: time, spare capacity, stocks, switching factors, perishability and production time
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Unlock This CourseHow responsive are producers?
Clothes on a production line can be made faster when prices rise - PES measures how much quantity supplied responds to a price change
Demand elasticity asks how buyers react to a price change. Now we look at the other side of the market: how do producers react when the price changes? When the price of a good rises, firms want to supply more. Some can do it quickly. Others cannot.
Key terms:
- Price elasticity of supply (PES): a measure of the responsiveness of the quantity supplied of a good to a change in its price.
The method mirrors PED from the earlier lessons, so we keep the calculation short here.
Calculating PES
The formula
PES = percentage change in quantity supplied ÷ percentage change in price
Because a price rise leads to a rise in quantity supplied, the answer is normally positive. This is different from PED, which is normally negative.
Worked example 1
The price of coffee in the made-up country of Kandara rises from $4 to $5 per kg. Quantity supplied rises from 800 kg to 880 kg a week.
Price: 1 ÷ 4 × 100 = +25%.
Quantity: 80 ÷ 800 × 100 = +10%.
PES: 10 ÷ 25 = 0.4. Supply is inelastic.
Worked example 2
A bakery in Lorvik raises its output of loaves when the price rises from $2.00 to $2.20. Quantity supplied rises from 500 to 600 loaves a day.
Price: 0.20 ÷ 2.00 × 100 = +10%.
Quantity: 100 ÷ 500 × 100 = +20%.
PES: 20 ÷ 10 = 2. Supply is elastic.
What the PES value tells you
The words elastic, inelastic and unitary mean the same here as they did for demand. The table shows the five cases and the supply curve for each.
| Type of supply | PES value | Supply curve | What it shows |
|---|---|---|---|
| Perfectly inelastic | 0 | A vertical straight line | Quantity supplied does not change at all when price changes |
| Inelastic | Between 0 and 1 | A steep upward-sloping curve | Quantity supplied changes by a smaller percentage than price |
| Unitary | Exactly 1 | A straight line through the origin | Quantity supplied changes by the same percentage as price |
| Elastic | Greater than 1 | A shallow upward-sloping curve | Quantity supplied changes by a larger percentage than price |
| Perfectly elastic | Infinity | A horizontal straight line | Producers will supply any amount at one price, and none below it |
How to draw each supply diagram
For every diagram, put Price on the vertical axis and Quantity on the horizontal axis. Label the curve S.
📈 Perfectly elastic
Draw a straight horizontal line across from the price axis and label it S. At that price producers supply any quantity. Below it, quantity supplied falls to zero.
⏱ Inelastic
Draw a steep upward-sloping line that meets the quantity axis, or a steep curve. A price rise from P1 to P2 moves you up the curve, but quantity rises only a little, from Q1 to Q2.
🏀 Elastic
Draw a shallow upward-sloping line that starts on the price axis. The same price rise causes a large rise in quantity, from Q1 to Q2.
⚖ Unitary
Draw a straight upward-sloping line that starts exactly at the origin, where the two axes meet. Its steepness does not matter. What matters is that it passes through the origin.
Exam tip: check where the line starts
A straight supply line that cuts the price axis is elastic. A straight supply line that cuts the quantity axis is inelastic. A straight line that goes through the origin is unitary. Do not judge by steepness alone when comparing lines that start in different places.
What makes supply elastic or inelastic?
Key terms:
- Spare capacity: the amount a firm could produce with its existing resources but is not producing now.
- Stocks: goods a firm has already made and is holding, ready to sell.
- Perishable good: a good that goes bad quickly and cannot be stored for long.
Supply is elastic when firms can raise output quickly and cheaply. It is inelastic when they cannot. Six influences decide which.
1. Time period
In the short run, firms cannot easily change their factories, land or equipment, so supply is more inelastic. Over a longer time they can build, train and expand, so supply becomes more elastic.
2. Spare capacity
A firm with spare capacity can raise output quickly when the price rises, so supply is elastic. A firm already working at full capacity cannot produce more, so supply is inelastic.
3. Stocks
A firm holding large stocks can release them straight away when the price rises, so supply is elastic. With no stocks, it must wait until it makes more, so supply is inelastic.
4. Ease of switching factors of production
If workers, machines and materials can easily be moved from making one good to another, firms can respond quickly to a price change, so supply is elastic. If factors are specialised, such as a machine that can only make one product, supply is inelastic.
5. Perishability
Fresh fish can't sit in a warehouse waiting for higher prices, so its supply is inelastic - perishable goods can't be stockpiled
Perishable goods, such as fresh fish or flowers, cannot be stored. Producers cannot hold stocks ready to release when the price rises, so supply is inelastic. Goods that can be stored easily, such as tinned food, have more elastic supply.
6. How long production takes
If a good can be made in hours, such as a cup of tea, supply is elastic. If it takes a long time, such as growing cocoa trees or building a ship, supply is inelastic, because output cannot rise quickly.
Common mistakes
Common mistakes
Mixing up the diagrams: demand curves slope down but supply curves slope up, so a supply curve for PES is never a downward-sloping line.
Saying a steep curve is always inelastic. Check where straight lines start, and remember that unitary means a straight line through the origin.
Forgetting that time matters. Always say whether you mean the short run or the long run, because supply is usually more elastic over a longer time.
Writing a negative PES. A normal supply curve gives a positive answer.
Exam-style question
In the made-up country of Delmar, a farm grows fresh flowers and a workshop makes wooden chairs. The price of chairs rises from $50 to $60, and the quantity supplied rises from 200 to 210 a week.
(a) Define price elasticity of supply. [2 marks]
(b) Calculate the price elasticity of supply of chairs. Show your working. [2 marks]
(c) Explain why the supply of fresh flowers is likely to be inelastic in the short run. [4 marks]
Model answer
(a) PES is a measure of how responsive (1) the quantity supplied of a good is to a change in its price (1).
(b) Price change = 10 ÷ 50 × 100 = 20%. Quantity change = 10 ÷ 200 × 100 = 5% (1). PES = 5 ÷ 20 = 0.25 (1).
(c) Fresh flowers are perishable (1), so growers cannot store them and release stocks when the price rises (1). Flowers also take time to grow (1), so in the short run output cannot be raised quickly even if the price goes up (1). So quantity supplied changes by a smaller percentage than price.
Exam tip
In part (c), give a reason and then say what it does to output. Use the words 'perishable' and 'short run' and link your answer back to PES.