Edexcel A-Level Economics · Revision notes

1.2.5 Elasticity of Supply

Price elasticity of supply measures how responsive producers are to a change in price. It answers a practical question: when price rises, can this industry actually produce more, and how quickly?

PES = % change in quantity supplied ÷ % change in price

PES is normally positive, because price and quantity supplied move in the same direction.

Worked example

A bakery raises its price from £2.00 to £2.20 and increases output from 400 loaves to 460 a week.

Step 1 — percentage change in quantity supplied. (460 − 400) ÷ 400 × 100 = +15%

Step 2 — percentage change in price. (2.20 − 2.00) ÷ 2.00 × 100 = +10%

Step 3 — divide. PES = 15 ÷ 10 = +1.5

Supply is relatively elastic: producers increased output proportionally more than the price rose.

As with demand elasticity, always divide by the original value.

Interpreting the value

A useful geometric point: any straight-line supply curve drawn through the origin has a PES of exactly 1, whatever its gradient.

What determines PES

Time. The most important determinant by a distance. In the very short run (the momentary period) output is effectively fixed and PES is close to zero. In the short run at least one factor is fixed, so output can rise somewhat. In the long run all factors can be varied, new firms can enter, and supply becomes much more elastic.

Evaluation: This is why the same industry has different elasticities over different horizons, and why "it depends on the time period" is the most useful thing to say about any PES question.

Spare capacity. A firm operating below capacity can raise output quickly. One already at full capacity cannot. After a recession, spare capacity is widespread and supply is elastic.

Stocks. Goods that can be stored allow an immediate response from inventory. Perishables and services cannot be stockpiled, so supply is inelastic.

Factor mobility. If workers and machinery can switch easily between uses, supply is more elastic. Highly specialised equipment or skills make it inelastic.

Ease of entry. If new firms can enter quickly, industry supply is more elastic. Barriers to entry make it inelastic.

Production lags. Agriculture is the standard case: a crop takes a season to grow, so this year's output cannot respond to this year's price however high it rises. Supply is close to perfectly inelastic within the season.

Short run and long run

The distinction here is not about calendar time but about what can be varied:

• Short run: at least one factor of production is fixed, usually capital. Output can only be raised by using the variable factors more intensively.
• Long run: all factors can be varied. Firms can build new capacity and new firms can enter.

How long the short run lasts differs enormously between industries. For a market stall it may be days; for nuclear power, a decade. That is why the short run is defined by fixed factors rather than by a period of time.

Why PES matters

• Price volatility. Where supply is inelastic, a shift in demand causes a large price change and a small quantity change. This is why agricultural and oil prices swing so sharply.
• Tax incidence. The more inelastic supply is relative to demand, the more of an indirect tax is borne by producers.
• Speculation. Inelastic supply makes a market more attractive to speculators, since prices move more.
• Policy response time. A government trying to increase housing supply faces a long production lag, which is why housing policy works slowly.

Key terms

Common mistakes

• Dividing by the new value. The denominator is the original figure.
• Defining the short run as a fixed period. It is defined by at least one factor being fixed, and its length varies by industry.
• Forgetting that PES rises over time. Any answer about supply response should distinguish the time horizon.
• Assuming a steeper curve always means lower elasticity. Gradient and elasticity are not the same thing: every straight-line supply curve through the origin has PES of 1.
• Confusing spare capacity with stocks. Spare capacity is unused productive capability; stocks are goods already made.

How this has been examined

In the Edexcel papers indexed on this site, this topic has appeared in four formats:

• 4-mark "Explain" data response — asked twice across 2 series (2024 to 2025)
• 1-mark multiple choice — asked twice across 2 series (2019 to 2024)
• 2-mark calculation — asked once (2019)
• 2-mark "Explain" — asked once (2019)

It is examined at lower tariffs, and recently: two of the four formats appeared in 2024 and 2025.

Where this goes next

Supply elasticity feeds directly into 1.2.6 Price determination, where it governs how much a demand shift moves price rather than quantity, and into 1.2.9 Indirect taxes and subsidies, where it determines who bears a tax. The demand-side equivalent is 1.2.3 Price, income and cross elasticities of demand. The short-run and long-run distinction introduced here is developed at length in 3.3.2 Costs.