Calculation, Determinants & Significance of PES | Economics for GCSE/IGCSE - Year 11 PDF Download

The Definition & Calculation of PES

• The law of supply stipulates that with a price increase (assuming other factors remain constant), producers will boost the quantity supplied, and conversely.
  • Economists focus on gauging the extent of the increase in quantity supplied.
• Price elasticity of supply (PES) indicates the degree of responsiveness of quantity supplied to price changes.
  • This responsiveness varies across distinct product categories.

To calculate PES

• PES can be calculated using the formula:

• To calculate a percentage change:

Interpretation of PES Value

The Determinants of PES

• Certain products exhibit greater responsiveness to price changes compared to others.
• The factors influencing this responsiveness are referred to as the determinants of Price Elasticity of Supply (PES) and comprise:
  • Mobility of Factors of Production: This refers to how easily producers can switch their resources between different products. When producers can quickly adapt, PES tends to be more elastic. For instance, if the price of hiking boots rises, and shoe manufacturers can readily shift resources from making trainers to boots, the supply of boots becomes more price elastic.
  • Availability of Raw Materials: The scarcity or abundance of raw materials plays a crucial role in determining PES. When raw materials are scarce, PES is low or inelastic. Conversely, if raw materials are abundant, PES is higher or elastic.
  • Ability to Store Goods: Products that can be easily stored typically exhibit higher PES. For example, goods like tinned food products have higher elasticity in supply because producers can quickly increase supply when needed. On the other hand, products with limited storage capabilities have lower PES.
  • Spare Capacity: If there is excess capacity in factories producing certain goods, an increase in prices can lead to elastic supply. Conversely, if there is no spare capacity to ramp up production, the supply will be inelastic.
  • Time Period: In the short run, it may be challenging for producers to respond to price increases due to production constraints. For instance, products like avocados have a longer production cycle. However, in the long run, producers can adjust their factors of production to increase output.

The Significance of Price Elasticity of Supply (PES) for Stakeholders

• Understanding High and Low PES:
  • If producers have a high PES (elastic), they can quickly adapt to price changes. This agility allows them to boost revenues and profits by supplying more goods.
  • On the contrary, low PES (inelastic) indicates a slow response to price shifts, leading to persistent price hikes and potential inflation in the economy.
• Government Interest in PES:
  • Governments closely monitor the PES of critical markets to ensure prompt responses to increasing demand.
  • For instance, in the housing market, low PES can make property prices unaffordable with rising demand.
  • Similarly, in the labor market, low PES can swiftly escalate production costs for firms when hiring additional workers becomes necessary.
• Factors Influencing PES:
  • Producers can enhance their PES by creating surplus production capacity, maintaining larger inventories, and adopting advanced technologies.