Price Elasticity of Supply (PES)

This lesson covers price elasticity of supply — a measure of how responsive the quantity supplied is to a change in price. PES is important for understanding how quickly and effectively markets can respond to changes in demand, and it has significant implications for the effects of indirect taxes and subsidies. This topic is examined on AQA Paper 1.

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What is Price Elasticity of Supply?

Key Definition: Price elasticity of supply (PES) measures the responsiveness of the quantity supplied of a good to a change in its price, ceteris paribus.

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The PES Formula

PES = Percentage change in quantity supplied / Percentage change in price

PES = (%ΔQs) / (%ΔP)

PES is always positive (or zero) because of the law of supply — a higher price leads to a higher quantity supplied.

Worked Example

The price of strawberries rises from £2.00 to £2.40 per punnet (a 20% increase). Farmers increase supply from 10,000 punnets to 11,000 punnets per week (a 10% increase).

PES = +10% / +20% = 0.5

Supply is price inelastic — quantity supplied increased proportionately less than the price increase.

Exam Tip: Unlike PED, there is no need to worry about the sign of PES — it is always positive. Focus on whether the value is greater than, less than, or equal to 1.

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Interpreting PES Values

PES Value	Description	Meaning	Supply Curve Shape
PES = 0	Perfectly inelastic	Quantity supplied cannot change regardless of price	Vertical line
0 < PES < 1	Inelastic	Quantity supplied changes proportionately less than price	Steep curve
PES = 1	Unit elastic	Quantity supplied changes proportionately the same as price	Straight line through the origin
PES > 1	Elastic	Quantity supplied changes proportionately more than price	Flat/shallow curve
PES = ∞	Perfectly elastic	Producers can supply any quantity at the prevailing price	Horizontal line

Diagram Description

• A perfectly inelastic supply curve is a vertical line — quantity supplied is fixed regardless of price. This applies to goods whose supply cannot be increased, such as tickets to a sold-out concert or land in a prime city-centre location (as recognised by David Ricardo, 1817).
• A perfectly elastic supply curve is a horizontal line — producers can supply unlimited quantities at the current price. This might approximate the supply of a mass-produced, standardised good in the short term.
• Unit elastic supply is a straight line passing through the origin. Any straight-line supply curve passing through the origin has PES = 1, regardless of its gradient.

Exam Tip: A common exam error is to judge PES by the slope of the supply curve alone. Remember: any straight-line supply curve passing through the origin has PES = 1. What matters is where the line would cross the axes if extended.

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Determinants of PES

The following factors determine whether supply is elastic or inelastic:

1. Spare Capacity

If firms have spare capacity (unused factory space, idle machinery), they can increase output quickly in response to a price rise, making supply elastic. If firms are already operating at or near full capacity, it is difficult to increase output, making supply inelastic.

UK Example: During the COVID-19 pandemic, UK ventilator manufacturers initially had inelastic supply because they were at full capacity. It took time to retool and expand production, even with government support.

2. Availability of Stocks (Inventories)

If firms hold large stocks of finished goods, they can increase supply quickly by drawing down stocks, making supply elastic. If stock levels are low, supply is more inelastic.

3. Ease of Switching Production (Factor Mobility)

If factors of production (land, labour, capital) can easily be reallocated from one use to another, supply is elastic. If factors are occupationally or geographically immobile, supply is inelastic.

UK Example: A textile factory can relatively easily switch from producing one type of clothing to another (elastic supply). A power station cannot easily switch from generating electricity to producing something else (inelastic supply).

4. Time Period

This is the most important determinant of PES:

Time Period	PES	Explanation
Momentary/very short run	Perfectly inelastic (PES = 0)	Output is completely fixed; supply cannot respond at all
Short run	Inelastic (0 < PES < 1)	At least one factor is fixed; firms can increase variable inputs but face diminishing returns
Long run	Elastic (PES > 1)	All factors are variable; firms can build new capacity, enter/exit the market

5. Nature of the Product: Primary vs Manufactured Goods

• Primary goods (agricultural products, minerals, oil) tend to have inelastic supply, particularly in the short run. Agricultural products have growing seasons — a farmer cannot increase wheat output mid-season. Oil extraction requires long-term investment in exploration and drilling.