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IB DP Economics — Unit 2: Microeconomics | SL | 2.6 Elasticity of Supply
📋 What You Will Learn
- Define price elasticity of supply (PES) and state the formula correctly
- Identify and explain the five degrees of PES with their corresponding supply curve shapes
- Analyse the determinants of PES and explain why they affect producer responsiveness
- Apply PES concepts to real-world markets including agricultural goods, manufactured goods, and services
- Evaluate the significance of PES for government policy, tax incidence, and market adjustment
🔍 Guiding Question Why do some producers respond rapidly to price rises while others cannot — and what are the economic consequences of this difference?
🌍 Why This Matters When global wheat prices surged by over 50% in 2022 following Russia's invasion of Ukraine, farmers could not simply double their output overnight — land, seeds, and growing seasons constrained supply. Meanwhile, a software firm facing a price rise for its product could scale output within days by hiring remote workers. Same price signal; completely different supply responses. That difference is price elasticity of supply.
What Is Price Elasticity of Supply?
When the price of a good rises, producers have an incentive to supply more. But how much more? The answer depends on how easily and quickly producers can increase output — and this varies dramatically across industries. PES gives us a precise measure of this responsiveness.
📖 Definition — Price Elasticity of Supply (PES) Price elasticity of supply measures the responsiveness of quantity supplied to a change in the price of a good, ceteris paribus.
PES Formula
\[ \text{PES} = \frac{\%\Delta Q_s}{\%\Delta P} \] Where \( \%\Delta Q_s \) is the percentage change in quantity supplied and \( \%\Delta P \) is the percentage change in price.
Unlike PED, PES is always positive . This is because of the law of supply: as price rises, quantity supplied rises — both move in the same direction, so the ratio is positive. There is no need to take an absolute value.
💡 Sign Convention PES is always positive (or zero). A positive PES simply reflects the direct relationship between price and quantity supplied. If you calculate a negative PES, check your working — you have likely made a sign error.
Degrees of Price Elasticity of Supply
Just as with PED, there are five benchmark values of PES, each corresponding to a distinct supply curve shape. Understanding these shapes is essential for diagram work in exams.
The Five Degrees of PES
- Perfectly inelastic (PES = 0): quantity supplied does not change at all when price changes — supply curve is vertical. Example: a painting by a deceased artist; land in a fixed location.
- Relatively inelastic (0 < PES < 1): percentage change in quantity supplied is smaller than the percentage change in price — supply curve is steep. Example: agricultural