PES

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 to 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 $800 to$920 leads to 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 $3 to$4.5 results in a supply increase from 25 to 30 kilos.
• Unitary Elastic Supply — when the percentage change in quantity supplied equals the percentage change in price. Example: Not provided in the slides.
• Perfectly Inelastic Supply — when quantity supplied does not change as price changes. Example: Cinema tickets have a fixed supply regardless of price changes.
• Perfectly Elastic Supply — when quantity supplied can increase infinitely with a price increase and falls to zero with a price decrease. Example: Not provided in the slides.

Exam Tips

Key Definitions to Remember

• Price Elasticity of Supply (PES)
• Elastic Supply
• Inelastic Supply
• Unitary Elastic Supply
• Perfectly Inelastic Supply
• Perfectly Elastic Supply

Common Confusions

• Confusing PES with price elasticity of demand (PED)
• Misunderstanding the difference between elastic and inelastic supply

Typical Exam Questions

• What is PES? PES is the responsiveness of quantity supplied 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 have longer production times and poorer storage capabilities.

What Examiners Usually Test

• Understanding of the PES concept and its calculation
• Ability to differentiate between degrees of PES
• Application of PES to real-world examples, such as primary commodities versus manufactured goods