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O Level · Economics 0455

2.8 Price Elasticity of Supply (PES)

Revise 2.8 Price Elasticity of Supply (PES) for Economics 0455 (O Level) — revision notes and instant AI marking.

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What You'll Learn

1. Calculate PES using the formula with percentage changes in quantity supplied and price

2. Interpret PES values from 0 (perfectly inelastic) to ∞ (perfectly elastic)

3. Understand determinants — the 5 factors that affect how elastic supply is

4. Apply to stakeholders — why governments and firms care about PES

Understanding Price Elasticity of Supply

Before we dive into calculations, let's understand the why behind PES.

Imagine you run a café and the price of coffee suddenly doubles. Can you sell twice as much coffee next week? Probably not — you'd need more beans, more cups, more staff. You can't scale up instantly.

Now imagine you're a software company and the price of your app subscription doubles. Can you serve twice as many customers next week? Yes — almost instantly — because there's no physical limit stopping you.

This is what PES measures: How quickly and easily can producers increase supply in response to a price increase?

Why Does This Matter?

If a government wants to encourage more housing (by making land more expensive), they need to know: can builders actually build more houses quickly? If supply is inelastic, prices just shoot up instead — that's inflation. If supply is elastic, more gets produced and everyone wins.

The Law of Supply vs. PES

The Law of Supply says: "When price increases, quantity supplied increases (all else equal)." That's the direction — always up.

But PES answers: "By how much?" 10% more? 100% more? 0.5% more? That's the elasticity question.

How to Calculate PES

The Formula

PES = % change in QS
────────────────
% change in P

Where QS = Quantity Supplied and P = Price

Before you can use this formula, you need to calculate the two percentage changes separately:

Percentage Change Formula

% Change = (New Value − Old Value)
────────────────────────────────
Old Value
× 100

Critical Exam Tip

When you calculate PES, your final answer should NOT be a percentage. You calculate the percentage changes as steps, but the final PES value is just a number (like 0.5 or 2.3). Expressing it as a percentage is a common mistake that loses marks.

Worked Example: Avocados

Real Scenario

Bewdley Farm Shop in Wales noticed avocado prices increased from £0.90 to £1.45 per unit. They managed to increase supply from 110 units/week to 120 units/week. Calculate the PES and explain the value.

Step 1: Calculate % change in Quantity Supplied

% ΔQS = (120 − 110) ÷ 110 × 100
% ΔQS = 10 ÷ 110 × 100
% ΔQS = 9.1%

The supply increased by 9.1%.

Step 2: Calculate % change in Price

% ΔP = (1.45 − 0.90) ÷ 0.90 × 100
% ΔP = 0.55 ÷ 0.90 × 100
% ΔP = 61.1%

Step 3: Apply the PES formula

PES = 0.15

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Also in the full note

Interpreting PES Values
The 5 Determinants of PES
Why PES Matters: Stakeholder Impact
Key Terms & Formulas to Memorise
Understanding the Spectrum
Key Insight: Why Some Products Are Elastic, Others Inelastic
1. Mobility of Factors of Production
2. Availability of Raw Materials

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