Price Elasticity of Supply (PES) — Edexcel A-level Economics

SPEC 1.1 • INTRODUCTION TO MARKETS

Price Elasticity of Supply

PES formula, interpretation, five key determinants — and why PES determines who bears the burden of a tax

What is PES?

Price Elasticity of Supply measures the responsiveness of quantity supplied to a change in price. It tells us how quickly and easily producers can adjust their output when market price changes.

Price Elasticity of Supply (PES)

A measure of the responsiveness of quantity supplied to a change in the price of a good or service.

Key Point

PES is always positive because of the law of supply — as price rises, quantity supplied rises. There is a positive causal relationship between price and quantity supplied.

Exam Tip

Don't confuse PES with PED. PES measures the supply-side response. A common error is writing "consumers will buy more" in a PES answer — this is a demand response, not supply.

The PES Formula

PES is calculated using the same percentage-change approach as PED and XED:

PES = % change in quantity supplied ÷ % change in price

Formula Breakdown

% change in Qs = (New Qs − Old Qs) ÷ Old Qs × 100

% change in P = (New P − Old P) ÷ Old P × 100

Key Point

Unlike PED, there is no need to ignore the sign — PES is naturally positive. If you get a negative PES, you've made a calculation error or confused supply with demand.

Examiner Alert

Always show your working in calculation questions. Write the formula first, then substitute, then calculate. Marks are awarded for method even if the final answer is wrong.

Interpreting PES Values

The size of PES tells us how responsive supply is:

PES ValueTermMeaningExample

PES = 0Perfectly inelasticQuantity supplied cannot change at allLand, concert tickets (fixed venue)

0 < PES < 1InelasticQs changes by a smaller % than priceAgricultural crops (growing season)

PES = 1Unitary elasticQs changes by the same % as priceTheoretical benchmark

PES > 1ElasticQs changes by a larger % than priceManufactured goods with spare capacity

PES = ∞Perfectly elasticAny quantity supplied at a given pricePerfectly competitive firm (horizontal S)

Exam Tip

When interpreting a PES value, always state: (1) the value, (2) whether elastic/inelastic, and (3) what this means for producers — e.g. "PES = 0.4, supply is price inelastic, meaning producers cannot easily increase output in response to a price rise."

PES Curves — The Five Types

The gradient of the supply curve reflects PES. Steeper curves = more inelastic. Flatter curves = more elastic.

Key Point

Unitary elastic supply (PES = 1) is any straight-line supply curve that passes through the origin. This is a common exam trick — it doesn't have to be 45°.

Determinant 1: Spare Capacity

The most important determinant of PES. Spare capacity means a firm has unused resources (idle machinery, empty factory floor space, underemployed workers) that can be brought into production quickly.

Price rises

Firm has spare capacity

Increases output quickly

PES is elastic

Spare Capacity → Elastic PES

Firms can ramp up production without significant cost increases. Common during a recession when resources are underutilised.

No Spare Capacity → Inelastic PES

Firms are already at or near full capacity. Increasing output requires new investment (factories, equipment), which takes time. Common during a boom.

Exam Tip

Link spare capacity to the trade cycle for AO2 marks: "In a recession, firms are more likely to have spare capacity, making PES more elastic in the short run."

Determinant 2: Time Period

Time is a crucial determinant. Supply becomes more elastic over time because producers have longer to adjust factors of production.

Short Run — Inelastic

At least one factor of production is fixed. A farmer cannot instantly grow more wheat. A manufacturer cannot build a new factory overnight. Output adjustment is limited.

Long Run — Elastic

All factors become variable. Firms can build new factories, hire workers, source new suppliers. New firms can enter the market attracted by higher prices.

Examiner Alert

Don't just state "time matters." Explain the mechanism: in the short run, at least one factor is fixed, so firms cannot fully adjust output. This is the difference between a Level 2 and Level 3 answer.

Determinant 3: Ability to Store Stocks

If a firm can hold inventories of finished goods, it can respond to price changes quickly by releasing stock onto the market — making PES more elastic.

Can Store → Elastic PES

Manufactured goods (tinned food, electronics, textbooks) can be warehoused. When price rises, firms release stock immediately without needing to increase production.

Cannot Store → Inelastic PES

Perishable goods (fresh fish, flowers, strawberries) and services (haircuts, hotel nights) cannot be stockpiled. Supply must be produced in real time.

Price of electronics rises

Warehouses hold stock

Release stock to market

Qs increases quickly → PES elastic

Exam Tip

Use specific examples to demonstrate this determinant — it is easy AO2 marks. Compare "fresh flowers (perishable, PES inelastic)" to "flat-screen TVs (storable, PES elastic)."

Determinant 4: Availability & Mobility of Factors

If the factors of production needed are readily available and mobile, firms can increase output more easily when price rises.

Factors Available → Elastic PES

Unskilled labour is relatively easy to hire. Raw materials that are abundant and easily sourced allow rapid production expansion. E.g. fast-food restaurants can hire and train quickly.

Factors Scarce → Inelastic PES

Specialist labour (surgeons, software engineers) takes years to train. Rare raw materials (lithium, rare earth metals) cannot be sourced overnight. E.g. semiconductor production is constrained by specialist equipment shortages.

Factor Mobility

Occupational mobility — can workers switch between jobs easily? Geographical mobility — can factors move to where they're needed? Low mobility = inelastic PES because even if demand rises, firms cannot attract the inputs needed to expand supply.

Determinant 5: Nature of the Production Process

Some goods have long production lags — the time between starting production and having a finished good ready for market.

Short Production Lag → Elastic PES

A newspaper can increase its print run within hours. A bakery can produce more bread overnight. Short lag means supply responds quickly to price signals.

Long Production Lag → Inelastic PES

A vineyard takes 3–5 years from planting to first harvest. New housing developments take 2–4 years. Oil extraction from new wells requires years of exploration and drilling.

Examiner Alert

The housing market is a classic exam example. Even when house prices rise sharply, supply is inelastic in the short run because of planning permission delays, construction time, and land scarcity. This is a high-value application point.

PES & Tax Incidence — The Policy Link

PES is directly tested in questions about who bears the burden of an indirect tax. The more inelastic supply is, the greater the share of the tax burden that falls on producers.

Inelastic Supply

Producers cannot easily reduce output, so they absorb most of the tax themselves. The consumer price rises only slightly.

Elastic Supply

Producers can easily switch production, so they pass most of the tax to consumers in the form of higher prices.

Gov't imposes tax

S shifts left (S₁ to S₁+tax)

PES determines incidence split

Inelastic S = producers bear more

Exam Tip

When discussing tax incidence, always refer to both PED and PES. The relative elasticity of supply and demand determines who bears the greater burden. This is an AO4 evaluation point worth building into tax/subsidy essays.

Worked Calculation

1

Calculating PES

The price of organic milk rises from £1.20 to £1.44 per litre. As a result, organic dairy farmers increase their quantity supplied from 500,000 litres to 550,000 litres per month. Calculate PES and comment on your answer.

PES = % change in Qs ÷ % change in price

Step 1: % change in Qs = (550,000 − 500,000) ÷ 500,000 × 100 = 10%

Step 2: % change in P = (£1.44 − £1.20) ÷ £1.20 × 100 = 20%

Step 3: PES = 10% ÷ 20% = 0.5

Interpretation

PES = 0.5, meaning supply is price inelastic. A 20% increase in price leads to only a 10% increase in quantity supplied. This is because organic dairy farming has a long production lag — cows cannot produce significantly more milk in the short run, and organic certification takes time for new farms.

Practice Question

Question: The UK housing market has experienced sustained price increases over the past decade, yet new housing supply has failed to keep pace with demand.

(a) Calculate PES if house prices rise by 15% and the quantity of new homes supplied rises by 3%. (2 marks)

(b) Explain two determinants of PES that help explain why housing supply is price inelastic. (4 marks)

(a)

PES = % change in Qs ÷ % change in P = 3% ÷ 15% = 0.2. Supply is price inelastic — quantity supplied changes by a proportionally smaller amount than price.

(b1)

Long production lag — new housing takes 2–4 years from planning permission to completion. Even when prices signal high demand, developers cannot deliver new homes quickly, making PES inelastic in the short to medium run.

(b2)

Factor scarcity — land availability in the UK is constrained by planning regulations (green belt), and there is a documented shortage of skilled construction workers. These supply-side constraints prevent firms from expanding output even when prices rise, keeping PES inelastic.

Examiner Alert — Common PES Errors

These errors appear repeatedly in examiner reports. Avoid every one of them.

Most Common Mistakes

Confusing PES with PED — PES is about producers and their ability to change quantity supplied, NOT about consumer responsiveness

Saying "PES is negative" — PES is always positive due to the law of supply. A negative sign means you've made a calculation error

Listing determinants without explaining the mechanism — don't just say "spare capacity." Explain WHY spare capacity makes PES elastic (idle machines can be restarted quickly, increasing output without new investment)

Confusing movements along vs shifts of the supply curve — PES measures a movement along the supply curve (price change → Qs change). A shift is caused by a non-price factor

Ignoring PES in tax/subsidy diagrams — always discuss how the elasticity of supply affects tax incidence. This is an evaluation point examiners are looking for

AO4 Evaluation Toolkit — PES

Use these evaluative points in any essay that involves supply responsiveness, tax incidence, or market intervention.

Eval 1: Time Period

"The extent to which supply is elastic depends on the time period. In the short run, supply is likely to be inelastic because at least one factor of production is fixed. In the long run, all factors become variable, making supply more elastic."

Eval 2: Industry Variation

"PES varies significantly between industries. Manufacturing firms with spare capacity may have elastic supply, while agricultural producers face seasonal and biological constraints that make supply inelastic regardless of price."

Eval 3: Tax Incidence

"The effectiveness of an indirect tax depends on PES: if supply is inelastic, producers absorb more of the tax, reducing the government's ability to correct the market failure through price signals to consumers."

Eval 4: PES Changes Over Time

"PES is not static. A firm currently at full capacity (inelastic) may invest in new plant, making supply more elastic in the future. This means the short-run and long-run effects of a policy may differ."

Summary

Key Takeaways

ConceptDetail

PES DefinitionResponsiveness of quantity supplied to a change in price

Formula% change in Qs ÷ % change in P (always positive)

Elastic (PES > 1)Qs responds more than proportionally to price change

Inelastic (PES < 1)Qs responds less than proportionally to price change

5 DeterminantsSpare capacity, time period, stocks, factor availability, production lag

The Big Link

PES determines tax incidence. Inelastic supply → producers bear more. Elastic supply → consumers bear more. Always bring this into tax/subsidy evaluation.

Mnemonic: S.T.A.F.N.

Spare capacity · Time period · Ability to store stocks · Factor availability · Nature of production

Exam Tip

In any essay on indirect taxes, subsidies, or market intervention, PES is a free evaluation point. State: "The effectiveness of this policy depends on the price elasticity of supply, because..." and develop the mechanism. This takes 30 seconds and can push you from Level 3 to Level 4.