The Definition & Calculation of PES
- The law of supply states that when there is an increase in price (ceteris paribus), producers will increase the quantity supplied and vice versa
- Economists are interested by how much the quantity supplied will increase
- Price elasticity of supply (PES) reveals how responsive the change in quantity supplied is to a change in price
- The responsiveness is different for different types of products
- The responsiveness is different for different types of products
Calculation of PES
- PES can be calculated using the following formula
- To calculate a % change, use the following formula
Worked example
In recent months, the price of avocados has increased from AU$ 0.90 to AU$ 1.45. Bewdley Farm Shop in Margaret River has sought to maximise their profits by increasing the quantity supplied to the market. They have been able to increase sales from 110 units a week to 120 units a week. Calculate the PES of avocados and explain one reason for the value [4]
Step 1: Calculate the % change in QS
Step 2: Calculate the % change in P
Step 3: Insert the above values in the PES formula
(Two marks for the correct answer or 1 mark for any correct working)
Step 4: Explain one reason for the value
The PES value of 0.15 indicates that avocados are very price inelastic in supply [1]. Even with a significant increase in price, suppliers are unable to supply more likely due to the time it takes to grow additional avocados [1]
Examiner Tip
When doing elasticity calculations make sure that your final answer for YED is not expressed as a percentage. This is a common error and loses marks.
In Paper 2 you are occasionally given the PED value and the %Δ in QD. You are then asked to calculate the %Δ in price. Follow the standard math procedure as follows:
1. Substitute the values provided into the equation
2. Substitute X for %Δ in price
3. Solve for X
For these calculations, ensure your final answer is in the correct unit (% or currency) and round your final answer to two decimal places