Price elasticity of supply
- Cambridge IGCSE
- Economics
Speaker notes: Write the syllabus reference for this subtopic here.
Learning Objectives
- Define price elasticity of supply (PES).
- Calculate PES using the formula.
- Identify the determinants of PES.
Speaker notes: By the end of the lesson, students should be able to...
Starter
- Imagine a sudden increase in the demand for strawberries. Can farmers quickly increase the supply? What factors might limit their ability to do so?
Speaker notes: Encourage students to think about the time it takes to produce goods and the resources available to producers.
Definition of PES
- Measures how responsive supply is to a change in price.
- Calculated as the percentage change in quantity supplied divided by the percentage change in price.
- PES is usually positive, as price and quantity supplied move in the same direction.
Speaker notes: Explain that PES helps us understand how quickly producers can respond to price changes. Ask students to think of examples where supply might be very elastic or very inelastic.
Calculating PES
- Formula: PES = (% change in quantity supplied) / (% change in price).
- Percentage change = (New value - Old value) / Old value x 100.
- PES can be elastic (PES > 1), inelastic (PES < 1), or unitary elastic (PES = 1).
Speaker notes: Write the formula on the board and explain each part. Provide an example to illustrate the calculation. Ask students to practice calculating PES with a simple example.
Determinants of PES: Availability of spare capacity
- If firms have spare capacity, they can increase supply quickly.
- Example: A factory with unused machinery can produce more goods if the price increases.
Speaker notes: Explain that spare capacity allows firms to respond more quickly to price changes. Ask students to think of real-world examples where firms might have spare capacity.
Determinants of PES: Time period
- The longer the time period, the more elastic supply tends to be.
- Example: Farmers can increase the supply of crops over a year, but not immediately.
Speaker notes: Explain that firms need time to acquire resources and increase production. Ask students to think about how the time period might affect the supply of different goods.
Determinants of PES: Flexibility of factors of production
- If factors of production can be easily rearranged, supply is more elastic.
- Example: A baker can easily switch to making more bread if the price increases.
Speaker notes: Explain that flexible factors of production allow firms to respond more quickly to price changes. Ask students to think of examples where factors of production might be less flexible.
Determinants of PES: Mobility of factors of production
- If factors of production can move easily between industries, supply is more elastic.
- Example: Workers can move from one job to another if wages increase.
Speaker notes: Explain that mobile factors of production allow firms to respond more quickly to price changes. Ask students to think of examples where factors of production might be less mobile.
Worked Example
- A firm increases the supply of widgets from 100 to 150 when the price rises from £2 to £3. Calculate PES.
Speaker notes: Step 1: Calculate the percentage change in quantity supplied. Step 2: Calculate the percentage change in price. Step 3: Divide the percentage change in quantity supplied by the percentage change in price to get PES.
Common Mistakes and Exam Tips
- Remember that PES is usually positive.
- Be careful when calculating percentage changes - always use the old value as the denominator.
- When answering exam questions, make sure to explain the determinants of PES, not just calculate it.
Speaker notes: Highlight common mistakes students make when calculating PES and provide tips for avoiding them. Encourage students to practice explaining the determinants of PES in their own words.
Key Terms
- Price elasticity of supply (PES)
- Percentage change
- Spare capacity
- Time period
- Flexibility of factors of production
- Mobility of factors of production
Speaker notes: Write the key terms on the board and ask students to define them in their own words. Encourage students to use these terms in their explanations and calculations.
Plenary: Quick-Check Questions
- What is the formula for PES?
- What does a PES of 0.5 mean?
- Give an example of a good with elastic supply.
- Give an example of a good with inelastic supply.
- What factors might make supply more elastic over time?
Speaker notes: Ask students to answer these questions in pairs or small groups. Encourage them to explain their answers to the class.
Plenary: Summary
- Price elasticity of supply measures how responsive supply is to a change in price.
Speaker notes: Summarise the key points of the lesson and encourage students to review their notes and practice calculations at home.