🏃 Elastic supply
Firms can raise output quickly. A small rise in price brings a big rise in quantity supplied.
Elasticity » Price Elasticity of Supply
What you'll learn this session
Study time: 30 minutes
Edexcel spec: 1.1.4 (h)-(l)
- What price elasticity of supply (PES) means and how to calculate it
- How to read a PES value from 0 to infinity
- How to draw price elastic and price inelastic supply on a diagram
- How the two extreme shapes look: perfectly inelastic and perfectly elastic
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Unlock This CourseHow much do sellers react to a price change?
A bakery can bake more bread within hours if prices rise, so its supply is quite price elastic
This topic is examined on Paper 1 (Microeconomics and Business Economics). Earlier lessons looked at how buyers react to a price change. Now we look at the other side of the market. When the price of a good goes up, firms usually want to supply more. But can they do it quickly and easily? Price elasticity of supply measures exactly that.
Key terms:
- Price elasticity of supply (PES): a measure of how much the quantity supplied of a good changes when its price changes.
- Price elastic supply: supply that is very responsive to a price change. Quantity supplied changes by a bigger percentage than price (PES above 1).
- Price inelastic supply: supply that is not very responsive to a price change. Quantity supplied changes by a smaller percentage than price (PES between 0 and 1).
The PES formula
Formula
PES = % change in quantity supplied ÷ % change in price
You are usually given the two percentage changes, and you divide one by the other. Sometimes you are given the old and new prices and quantities, and you must work out the percentages first. You learned how to do this in the lesson Price Elasticity of Demand: Calculating PED: the percentage change is the change divided by the original value, multiplied by 100.
One difference from PED is useful to know. Supply curves slope upwards, so price and quantity supplied normally move in the same direction. That means PES is normally a positive number. You do not need to worry about a minus sign.
Worked example 1: percentages given
A juice stall owner finds that when the price of a bottle rises by 10%, the quantity supplied rises by 25%.
PES = 25 ÷ 10 = 2.5
PES is above 1, so supply is price elastic.
Worked example 2: prices and quantities given
A farm sells a crate of pears for £20. The price rises to £25 and the farm increases supply from 500 crates to 550 crates.
1. % change in price = 5 ÷ 20 × 100 = 25%
2. % change in quantity supplied = 50 ÷ 500 × 100 = 10%
3. PES = 10 ÷ 25 = 0.4
PES is between 0 and 1, so supply is price inelastic.
Worked example 3: a price fall
A printing firm lowers its price per box of posters from £5 to £4, and the quantity supplied falls from 1,000 boxes to 700 boxes.
1. % change in price = −1 ÷ 5 × 100 = −20%
2. % change in quantity supplied = −300 ÷ 1,000 × 100 = −30%
3. PES = −30 ÷ −20 = 1.5
Both changes are negative, so the minus signs cancel and PES is positive. Supply is price elastic.
Reading the number
The size of the PES tells you how responsive supply is.
| PES value | Name | What it means |
|---|---|---|
| 0 | Perfectly price inelastic | Quantity supplied does not change at all, whatever the price. |
| Between 0 and 1 | Price inelastic | Quantity supplied changes by a smaller percentage than price. |
| 1 | Unitary price elastic | Quantity supplied changes by the same percentage as price. |
| Above 1 | Price elastic | Quantity supplied changes by a bigger percentage than price. |
| Infinity | Perfectly price elastic | Firms will supply any amount at one price, but nothing at a lower price. |
🐌 Inelastic supply
Firms find it hard to raise output. Even a big rise in price brings only a small rise in quantity supplied.
Showing PES on a diagram
Tickets for a stadium final are fixed by the number of seats, so supply is perfectly inelastic
Put price (P) on the vertical axis and quantity (Q) on the horizontal axis. Then draw the supply curve with an upward slope. The slope of the curve tells you the elasticity. To compare two curves fairly, use the same axes and the same price change.
How to draw price inelastic supply
- Draw a steep upward-sloping line and label it S.
- Mark a starting price P1 and a higher price P2 on the vertical axis. Draw dotted lines across to the curve and down to the quantity axis.
- Label the quantities Q1 and Q2. On a steep curve the gap between them is small.
A big price rise brings only a small rise in quantity supplied.
How to draw price elastic supply
- Draw a shallow (flatter) upward-sloping line and label it S.
- Mark the same P1 and P2 with dotted lines to the curve and down to the axis.
- Label Q1 and Q2. On a shallow curve the gap between them is large.
The same price rise brings a big rise in quantity supplied.
The special shapes
| Type | Shape to draw |
|---|---|
| Perfectly price inelastic (PES = 0) | A vertical straight line, labelled S. Quantity supplied stays the same at every price. |
| Unitary price elastic (PES = 1) | A straight upward-sloping line that starts at the origin (where the two axes meet). |
| Perfectly price elastic (PES = infinity) | A horizontal straight line, labelled S. Firms will supply any amount at that price. |
Perfectly inelastic and perfectly elastic supply are very rare in real life. Real goods sit somewhere between them.
Common mistakes
Common mistakes
- Mixing up the shapes. For supply, as for demand: steep = inelastic, shallow = elastic.
- Dividing the wrong way round. PES is % change in quantity supplied divided by % change in price.
- Using the actual change instead of the percentage change. A rise of 50 crates is not the same as a rise of 50%.
- Forgetting that PES is normally positive. A negative answer for an ordinary supply curve is a sign of an error.
- Saying that a PES of 0.4 is elastic. Any value below 1 is inelastic, even if it looks large.
- Forgetting to label the axes (P and Q) and the curve (S).
Exam-style question
A bakery sells loaves of sourdough bread. The table shows what happened when the price changed.
| Price per loaf | Quantity supplied per week |
|---|---|
| £3.00 | 800 |
| £3.75 | 840 |
(a) Define price elasticity of supply. [2 marks]
(b) Calculate the price elasticity of supply of the bakery's bread when the price rises from £3.00 to £3.75. Show your working. [3 marks]
(c) State whether supply is price elastic or price inelastic, and give a reason. [2 marks]
(d) Describe how you would draw a supply curve to show price inelastic supply. [3 marks]
Model answer
(a) PES is a measure of how much quantity supplied changes (1) when the price of a good changes (1).
(b) % change in price = 0.75 ÷ 3.00 × 100 = 25% (1). % change in quantity supplied = 40 ÷ 800 × 100 = 5% (1). PES = 5 ÷ 25 = 0.2 (1).
(c) Supply is price inelastic (1) because PES is less than 1, so quantity supplied changes by a smaller percentage than price (1).
(d) Draw price on the vertical axis and quantity on the horizontal axis (1). Draw a steep upward-sloping line labelled S (1). Show a rise from P1 to P2 with dotted lines, leading to only a small rise from Q1 to Q2 (1).
Exam tip
In a calculation, work out both percentage changes on separate lines before you divide. Even if you slip on the last step, you can still earn marks for the working.