Price elasticity of supply

G3 Economics - syllabus K343, 2027

What this lesson teaches

  • I can define price elasticity of supply (PES).

    Syllabus K343, 2.7.1. Definition of PES

  • I can calculate PES, say what the value means, and draw supply curves with different elasticities.

    Syllabus K343, 2.7.2. Calculation of PES: calculation of PES using the formula; interpretation of the significance of the PES value: perfectly inelastic, inelastic, unitary, elastic, perfectly elastic; drawing and interpretation of supply curve diagrams to show different PES

Make a guess

The price of strawberries rises 20% and farmers supply 10% more this season. Is supply elastic?

  1. No. PES is 0.5, so supply is inelastic.
  2. No. PES is -0.5, so supply fell.
  3. Yes. Supply rose by 10%, which is a big response, so it is elastic.
Show the answer

No. PES is 0.5, so supply is inelastic.

PES = 10 / 20 = 0.5. Quantity supplied rose, but by a smaller percentage than price, so supply is inelastic.

PES measures how strongly quantity supplied responds to a change in price.

Price elasticity of supply (PES) measures how responsive quantity supplied is to a change in the good's own price.

PES = percentage change in quantity supplied / percentage change in price. PES is positive, because price and quantity supplied move in the same direction.

A PES between 0 and 1 means supply is inelastic. A value greater than 1 means supply is elastic. Exactly 1 is unitary. 0 is perfectly inelastic: quantity supplied cannot change. Perfectly elastic supply is infinite.

On a diagram, elastic supply is flat and inelastic supply is steep. Perfectly inelastic supply is vertical, for example when a firm cannot get more raw materials. Perfectly elastic supply is horizontal.

PES
Responsiveness of quantity supplied to a change in price.
Formula
PES = % change in quantity supplied / % change in price.
Values
0-1 inelastic, >1 elastic, 1 unitary, 0 perfectly inelastic.

Worked example: Calculating PES

Suppose the price of strawberries rises from $5 to $6 a punnet, and farms supply 1,100 punnets a week instead of 1,000.

  1. Percentage change in price = 1 / 5 x 100 = 20%.
  2. Percentage change in quantity supplied = 100 / 1,000 x 100 = 10%.
  3. PES = 10% / 20% = 0.5.
  4. Interpret: less than 1, so supply is inelastic. Strawberries take time to grow.

Try it step by step

Problem 1

The price of a loaf of bread rises from $2.00 to $2.50. A bakery raises daily output from 1,000 to 1,100 loaves.

Show the working
  1. Percentage change in price: Change = 0.50. Percentage change = 0.50 / 2.00 x 100 = 25%
  2. Percentage change in quantity supplied: Change = 100. Percentage change = 100 / 1,000 x 100 = 10%
  3. PES: PES = 10 / 25 = 0.4. Below 1, so supply is inelastic.

Problem 2

The price of a phone case rises from $40 to $44. A seller raises weekly supply from 200 to 250 cases.

Show the working
  1. Percentage change in price: Change = 4. Percentage change = 4 / 40 x 100 = 10%
  2. Percentage change in quantity supplied: Change = 50. Percentage change = 50 / 200 x 100 = 25%
  3. PES: PES = 25 / 10 = 2.5. Above 1, so supply is elastic.

Problem 3

The price of a punnet of mushrooms rises from $5 to $6. Farms raise weekly supply from 300 to 330 punnets.

Show the working
  1. Percentage change in price: Change = 1. Percentage change = 1 / 5 x 100 = 20%
  2. Percentage change in quantity supplied: Change = 30. Percentage change = 30 / 300 x 100 = 10%
  3. PES: PES = 10 / 20 = 0.5. Below 1, so supply is inelastic.

Watch out for this

PES is negative, just like PED.

PES is positive. A higher price gives firms a reason to supply more, so price and quantity supplied move in the same direction.

Check your understanding

A firm cannot get more raw materials, so its output is fixed at 50,000 units. Price rises by 10%. What is its PES?

  1. 0
  2. 10
  3. 1
Show the answer

0

Right. Quantity supplied cannot change at all, so supply is perfectly inelastic.

Check your understanding

The price of a good rises from $8 to $10. Quantity supplied rises from 400 to 600 units. What is the price elasticity of supply?

  1. -2
  2. 2
  3. 0.5
  4. 100
Show the answer

2

Right. Quantity rises 50% (200 / 400) and price rises 25% (2 / 8): 50 / 25 = 2.

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