Study Notes
Price Elasticity of Supply (PES) measures how responsive the quantity supplied of a good or service is to a change in its price. It helps understand the strength of the relationship between price changes and supply adjustments.
- Price Elasticity of Supply (PES) — the responsiveness of quantity supplied to a change in price. Example: If the price of rice increases by 20%, and the quantity supplied increases by 60%, the PES is greater than 1, indicating elastic supply.
- Elastic Supply — when the percentage change in quantity supplied is greater than the percentage change in price. Example: For TVs, a price increase from 920 results in a supply increase from 600 to 800 units.
- Inelastic Supply — when the percentage change in quantity supplied is less than the percentage change in price. Example: For meat, a price increase from 4.5 results in a supply increase from 25 to 30 kilos.
- Perfectly Inelastic Supply — when quantity supplied does not change as price changes. Example: Cinema tickets have a fixed supply regardless of price changes.
- Unitary Elastic Supply — when the percentage change in quantity supplied equals the percentage change in price. Example: Not explicitly provided.
- Perfectly Elastic Supply — when quantity supplied can increase infinitely with a price increase and drop to zero with a price decrease. Example: Not explicitly provided.
Exam Tips
Key Definitions to Remember
- Price Elasticity of Supply (PES)
- Elastic Supply
- Inelastic Supply
- Perfectly Inelastic Supply
- Perfectly Elastic Supply
Common Confusions
- Confusing PES with Price Elasticity of Demand (PED)
- Misunderstanding the direction of responsiveness (supply responding to price changes, not vice versa)
Typical Exam Questions
- What is Price Elasticity of Supply? PES measures how much the quantity supplied of a good changes in response to a change in price.
- How do you calculate PES? PES is calculated as the percentage change in quantity supplied divided by the percentage change in price.
- Why is the PES for primary commodities generally lower than for manufactured products? Primary commodities often have longer production times and poorer storage capabilities, making their supply less responsive to price changes.
What Examiners Usually Test
- Understanding of the different degrees of PES
- Ability to calculate PES using given data
- Explanation of determinants affecting PES