DP Economics HL 2.6 Elasticity of Supply

DP Economics HL 2.6 Elasticity of Supply - Full notes

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DP Economics HL | 2.6 Elasticity of Supply

DP ECONOMICS · UNIT 2: MICROECONOMICS

2.6

Elasticity of Supply

Full notes for HL · IB-style

Contents

1	Price elasticity of supply: meaning and calculation
2	The range of PES values and their diagrams
3	Determinants of PES
4	Time and the supply response
5	Applications of PES
6	PES calculations: practice
7	Interpreting PES values
8	Determinants of PES
9	PES and time periods
10	Diagrams of PES
11	Primary versus manufactured goods
12	PES and price volatility
13	PES and tax incidence
14	PES and government policy
15	Spare capacity and stocks
16	Mixed review: worked problems
17	Additional exam-style practice
18	PES in labour markets
19	Comparing PED and PES
20	Evaluating elasticity estimates
21	Practice with diagrams
22	Real-world case: concert tickets
23	Common misconceptions and links
24	Exam-style question with markscheme
25	Check your understanding
26	Summary and topic map

These are full teaching notes. Read each section in order, try the Think about it question before you read on, and do every Quick check before moving to the next section.

Before you start

Rate yourself on each statement now, and again after you've worked through the notes. Shade R (not yet), A (getting there) or G (confident).

I can…	R	A	G
define and calculate PES and interpret the result
draw supply curves showing elastic, inelastic, unit elastic, perfectly elastic and perfectly inelastic supply
explain the determinants of PES with examples
explain why supply becomes more elastic over time
explain why primary products tend to have lower PES than manufactured goods
apply PES to price volatility, housing and commodity markets

There is no additional HL content in 2.6. SL and HL students study the same material.

Guiding questions

Why can a factory respond to higher prices in weeks while a cocoa farmer needs years? Why do house prices rise so steeply when demand increases?

How this topic is examined

PES is usually examined together with PED: questions on commodity price volatility, housing markets and development often need both. Paper 2 may ask you to calculate PES from data or to draw diagrams showing elastic and inelastic supply.

The highest marks go to answers that explain why supply is elastic or inelastic in a specific market, using the determinants, rather than simply stating it.

Command term	What the examiner wants
Define	the precise meaning, ideally in the IB wording, in one or two sentences
Draw / Sketch	a fully labelled diagram with every axis, curve, equilibrium and change labelled
Explain	a causal chain linked to economic theory, usually supported by a diagram
Analyse	break a situation into its parts and trace the effects of each
Evaluate / Discuss	weigh up arguments, question assumptions and reach a justified conclusion using real-world examples
Calculate	use %ΔQs ÷ %ΔP, show working and interpret the value

How to use these notes

Each section teaches one part of the syllabus in full. You'll see these boxes throughout; each has one job:

Box	What it's for
Think about it	a question to get you thinking before a section; the answer comes in the section
Key point	the one idea you must not forget
Common mistake	an error examiners see every year, and how to avoid it
In the real world	where the economics shows up outside the classroom
Try this	something quick you can do yourself to test the idea
Worked example	full solutions with IB-style marks (M1 method, A1 answer, R1 reasoning)
Quick check	short questions to test yourself at the end of each section

1 Price elasticity of supply: meaning and calculation

PES measures how quickly and how much producers can respond to a price change.

Think about it

The price of face masks rose tenfold early in 2020. Why couldn't factories simply produce ten times as many the next day?

Price elasticity of supply (PES) measures the responsiveness of the quantity supplied of a good to a change in its price:

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

Because the law of supply gives a positive relationship between price and quantity supplied, PES is positive. A PES of 2 means a 1% rise in price causes a 2% rise in quantity supplied; a PES of 0.5 means quantity supplied rises by only 0.5% for each 1% rise in price.

PES is fundamentally about how easily producers can change output. If firms can raise output quickly and without large increases in cost, supply is elastic. If output is hard to increase, because inputs are scarce, production takes a long time or capacity is full, supply is inelastic.

WORKED EXAMPLE 1 Calculating PES

When the price of T-shirts rises from $10 to $12, a factory increases weekly supply from 4 000 to 5 600. Calculate PES and interpret it.

Solution

%ΔQs = (5 600 − 4 000) ÷ 4 000 × 100 = 40%M1

%ΔP = (12 − 10) ÷ 10 × 100 = 20%M1

PES = 40 ÷ 20 = 2A1

PES > 1: supply is price elastic, so the factory can increase output proportionally more than the price riseR1

WORKED EXAMPLE 2 Using PES

Supply of a crop has PES = 0.4 in the short run. Its price rises by 25%. Calculate the percentage change in quantity supplied.

Solution

%ΔQs = PES × %ΔP = 0.4 × 25M1

= 10%A1

Quick check

1. State the formula for PES.

2. Why is PES positive?

3. Price rises 10%, quantity supplied rises 15%. Calculate PES.

Answers: 1. %ΔQs ÷ %ΔP 2. price and quantity supplied move together 3. 1.5

2 The range of PES values and their diagrams

Where a straight supply line meets the axes tells you its elasticity.

PES	Description	Diagram	Example
greater than 1	elastic	straight line cutting the price axis	manufactured goods with spare capacity
less than 1	inelastic	straight line cutting the quantity axis	agricultural crops in the short run
equal to 1	unit elastic	any straight line through the origin	theoretical case
0	perfectly inelastic	vertical line	seats in a stadium for one match
infinity	perfectly elastic	horizontal line	a firm that can supply any amount at the going price

Figure 1. Straight-line supply curves: the intercept, not the slope, tells you whether supply is elastic, inelastic or unit elastic.

This rule is worth remembering. For a straight-line supply curve, what matters is where it meets the axes, not how steep it looks. A line that starts on the price axis (so firms supply nothing until the price reaches a minimum) is elastic at every point. A line that starts on the quantity axis (so some output is supplied even at a very low price) is inelastic. Any straight line through the origin has a PES of exactly 1, however steep or flat it looks, because price and quantity change in the same proportion.

Common mistake

Judging PES by steepness alone. A steep line through the origin still has PES = 1. Look at where the line meets the axes.

Quick check

1. What PES does a vertical supply curve show?

2. A straight supply line cuts the price axis. Is supply elastic or inelastic?

3. What is PES for any straight line through the origin?

Answers: 1. 0 (perfectly inelastic) 2. elastic 3. 1

3 Determinants of PES

Everything comes back to how easily firms can increase output.

Think about it

A bakery has two ovens running only half the day. A car factory runs 24 hours a day. Which can respond more to a rise in the price of its product?

Spare capacity. If firms have unused machinery and workers, they can increase output quickly without much extra cost, so supply is elastic. A factory working at full capacity cannot increase output until it builds new capacity, so supply is inelastic.

Stocks (inventories). Firms that hold stocks of finished goods or raw materials can release them quickly when prices rise, making supply more elastic. Goods that cannot be stored, such as fresh flowers, fresh fish and electricity, tend to have inelastic supply.

Mobility of factors of production. If resources can easily be switched from producing one good to another, supply is elastic. A clothing factory that can switch from shirts to trousers responds quickly; a gold mine cannot easily switch to producing anything else.

Length of the production period. Goods that take a long time to produce have inelastic supply. Cocoa trees take several years to produce their first crop; ships and buildings take months or years. Goods produced quickly, such as printed T-shirts, have more elastic supply.

Time period considered. Supply is always more elastic in the long run than in the short run, because firms have more time to adjust all their inputs. This is important enough to have its own section.

Determinant	More elastic when...	More inelastic when...
Spare capacity	factories have unused capacity	working at full capacity
Stocks	goods can be stored	goods are perishable or cannot be stored
Factor mobility	resources can easily switch use	resources are specialized
Production period	short	long
Time	long run	short run

Quick check

1. Why does spare capacity make supply elastic?

2. Why is supply of fresh flowers inelastic?

3. Why is PES for cocoa low in the short run?

Answers: 1. output can rise quickly with little extra cost 2. they cannot be stored 3. trees take years to mature

4 Time and the supply response

The longer firms have to adjust, the more elastic supply becomes.

Economists often distinguish three time periods. In the momentary (immediate) period, supply is fixed: the fish already landed today is all that can be sold today, so supply is perfectly inelastic. In the short run, firms can increase output by using existing capacity more intensively, with overtime or extra shifts, but cannot build new factories, so supply is inelastic. In the long run, firms can expand capacity, new firms can enter, and resources can be fully reallocated, so supply becomes much more elastic.

Figure 2. Supply becomes more elastic as the time period lengthens.

WORKED EXAMPLE 3 PES over time

After the world price of cocoa rose by 50%, supply from one country was 2% higher after one year and 40% higher after four years. Calculate PES for each period and explain the difference.

Solution

After one year: PES = 2 ÷ 50 = 0.04A1

After four years: PES = 40 ÷ 50 = 0.8A1

In the short run farmers can only harvest existing trees more intensively; newly planted trees take several years to produceR1

so supply is much more elastic in the long run, though still inelastic hereR1

Quick check

1. What is PES in the momentary period?

2. Why is supply more elastic in the long run?

Answers: 1. zero: supply is fixed 2. firms can expand capacity and new firms can enter

5 Applications of PES

Low PES plus low PED explains why some prices swing wildly.

5.1 Primary products and price volatility

Primary products, such as agricultural crops and minerals, tend to have inelastic supply, especially in the short run: production depends on growing seasons and weather, mines take years to open, and many crops cannot be stored for long. Manufactured goods usually have more elastic supply, because factories can add shifts, hold stocks and switch production.

When inelastic supply is combined with inelastic demand (2.5), even small shifts in either curve cause large price changes. A poor harvest shifts a steep supply curve left along a steep demand curve, and prices soar; a bumper harvest sends them crashing. This volatility makes farm incomes unstable and is a major problem for developing countries that depend on a few commodity exports.

5.2 Housing

Housing supply is very inelastic in the short run: land is limited, planning permission takes time, and building takes months or years. When demand rises, because of population growth, rising incomes or low interest rates, the quantity of housing can barely respond, so prices rise steeply. This is a key reason for high house prices in many cities. Policies that make housing supply more elastic, such as releasing land or simplifying planning rules, help prices respond less sharply to demand.

Figure 3. When supply is inelastic, an increase in demand causes a large rise in price and only a small rise in quantity (compare with a flatter supply curve).

In the real world

Between 2020 and 2022 house prices in many countries rose by 20% or more, while new housing completions rose only a few percent. Low interest rates and demand for more space pushed demand up, but supply could not respond quickly.

Key point

Inelastic supply means demand shifts mainly change the price; elastic supply means they mainly change the quantity.

Quick check

1. Why do primary products have lower PES than manufactures?

2. Why does inelastic housing supply lead to large price rises?

3. Suggest one policy to make housing supply more elastic.

Answers: 1. long production periods, weather dependence, limited storage 2. demand rises but quantity cannot respond, so price absorbs the change 3. release land / speed up planning

6 PES calculations: practice

Responsiveness of supply.

PES = % change in quantity supplied/% change in price. PES is positive because supply curves slope upwards. PES > 1: elastic; PES < 1: inelastic; PES = 1: unit elastic; PES = 0: perfectly inelastic.

WORKED EXAMPLE 4 Calculation (standard)

Price rises from $10 to $12; quantity supplied rises from 500 to 650. Calculate PES.

Solution

%ΔQs = 30%; %ΔP = 20%M1

PES = 1.5 (elastic)A1

Quick check

1. Price rises 25%; quantity supplied rises 5%. Calculate PES.

2. PES = 0.8; price rises 15%. Predict the change in quantity supplied.

Answers: 1. 0.2: inelastic 2. rises 12%

7 Interpreting PES values

Ranges and examples.

PES	Description	Example
0	perfectly inelastic	seats in a stadium on match day
0 to 1	inelastic	agricultural goods in the short run
1	unit elastic	theoretical case
> 1	elastic	manufactured goods with spare capacity
∞	perfectly elastic	theoretical: any amount at one price

8 Determinants of PES

Why supply responds.

PES is higher when: there is spare capacity; stocks can be held; factors of production are mobile; production time is short; the time period is longer. Supply of perishable goods or goods requiring long production times is inelastic.

WORKED EXAMPLE 5 Determinants (exam level)

Explain why the supply of new housing is price inelastic in the short run.

Solution

Building takes a long time; planning permission neededR1

Land and skilled labour are limitedR1

9 PES and time periods

Momentary, short run, long run.

In the momentary period, supply cannot change (PES = 0). In the short run, firms can increase output using existing capital (PES low). In the long run, firms can expand capacity and new firms can enter (PES higher).

Quick check

1. Why is the supply of fresh fish on a given day perfectly inelastic?

Answers: 1. the catch has already been landed and fish are perishable

10 Diagrams of PES

Steep and flat curves.

A straight-line supply curve through the origin has PES = 1; one that cuts the price axis is elastic; one that cuts the quantity axis is inelastic. Steeper curves (in the same range) are generally less elastic.

Figure 4. With inelastic supply, an increase in demand mainly raises price.

WORKED EXAMPLE 6 Diagram (standard)

State the PES of any straight-line supply curve passing through the origin.

Solution

PES = 1A1

11 Primary versus manufactured goods

Contrasting PES.

Primary commodities (crops, minerals) usually have low PES because of long production times and natural constraints. Manufactured goods have higher PES because factories can change output quickly if there is spare capacity.

WORKED EXAMPLE 7 Comparison (exam level)

Explain why the price of coffee is more volatile than the price of televisions.

Solution

Coffee: low PES (trees take years to mature) and inelastic demandR1

Shifts in demand or supply cause large price changesR1

TVs: higher PES; output adjustsR1

12 PES and price volatility

Commodity markets.

When both demand and supply are inelastic, small shifts cause large price changes. This creates uncertain incomes for farmers and economies dependent on commodity exports.

In the real world

Lithium prices rose more than tenfold between 2020 and late 2022 as electric-vehicle demand surged, then fell sharply as new mines added supply.

Quick check

1. Why did lithium prices fall after new mines opened?

Answers: 1. supply increased once capacity expanded (higher long-run PES)

13 PES and tax incidence

Who bears the tax?

When supply is more elastic than demand, consumers bear most of an indirect tax; when supply is inelastic, producers bear more of the burden because they cannot easily reduce output.

WORKED EXAMPLE 8 Incidence (exam level)

A tax is placed on a good with inelastic supply and elastic demand. Who bears most of the tax?

Solution

ProducersA1

Price to consumers rises little; producers receive much lessR1

14 PES and government policy

Housing and agriculture.

Policies to increase PES include relaxing planning laws (housing), investing in training (labour), and improving storage and infrastructure (agriculture). Higher PES reduces price rises when demand increases.

Quick check

1. Suggest one policy to increase the PES of housing.

Answers: 1. relax planning restrictions or release public land for building

15 Spare capacity and stocks

Flexible supply.

Firms operating below full capacity or holding large stocks (inventories) can respond quickly to price changes, so their supply is elastic. Just-in-time production reduces stocks, which can make supply less elastic during shocks.

Quick check

1. Why can supply become less elastic during supply-chain disruptions?

Answers: 1. low inventories and production limits prevent quick increases

16 Mixed review: worked problems

Bringing the ideas together.

WORKED EXAMPLE 9 Mixed problem (exam level)

Demand for houses rises. Compare the effect on price and quantity in the short run and the long run.

Solution

Short run: PES low, mainly price risesR1

Long run: PES higher, quantity rises more, price rise smallerR1

17 Additional exam-style practice

Paper 1 and Paper 3.

WORKED EXAMPLE 10 Paper 3 style (exam level)

When price rises from $40 to $50, quantity supplied rises from 800 to 880. (a) Calculate PES. (b) Comment on the value.

Solution

(a) %ΔQs = 10%; %ΔP = 25%: PES = 0.4A1 A1

(b) inelastic: supply responds little to priceR1

18 PES in labour markets

Supply of skilled workers.

The supply of skilled labour (doctors, engineers) is inelastic in the short run because training takes years. This explains high wages when demand for skills rises suddenly.

Quick check

1. Why did wages for data scientists rise quickly in the 2010s?

Answers: 1. demand rose faster than the inelastic supply of trained workers

19 Comparing PED and PES

Summary.

Feature	PED	PES
measures	response of Qd to price	response of Qs to price
sign	negative	positive
key determinants	substitutes, necessity, time	capacity, stocks, time, factor mobility
use	pricing, tax revenue	price volatility, policy

20 Evaluating elasticity estimates

Limitations.

Elasticity estimates rely on past data and ceteris paribus; values change over time and along the curve. They are useful approximations but should be used with caution in policy.

Quick check

1. Why might past PES estimates be unreliable for the future?

Answers: 1. technology and market conditions change

21 Practice with diagrams

Inelastic versus elastic supply.

Draw two diagrams with the same increase in demand: one with steep (inelastic) supply showing a large price rise, one with flat (elastic) supply showing a large quantity rise. Label all equilibria.

WORKED EXAMPLE 11 Comparing (standard)

What do the two diagrams show?

Solution

Inelastic supply: large price rise, small quantity riseR1

Elastic supply: small price rise, large quantity riseR1

22 Real-world case: concert tickets

Fixed supply.

Tickets for a concert venue have perfectly inelastic supply (fixed seats). When demand is very high, prices rise sharply (official dynamic pricing or resale markets).

Quick check

1. Why do resale ticket prices for popular concerts rise so much?

Answers: 1. fixed supply with very high demand

23 Common misconceptions and links

Students often think…	Actually…
a steep supply curve is always inelastic	a straight line through the origin has PES = 1 regardless of slope
PES is negative like PED	PES is positive
supply responds the same in the short and long run	supply is more elastic in the long run
inelastic supply means firms are lazy	it reflects real constraints such as capacity and production time

How 2.6 connects to the rest of the course

Topic	Connection
2.2 Supply	PES measures responsiveness along the supply curve
2.5 Elasticity of demand	PED and PES together explain price changes
2.7 Role of government	tax incidence depends on PES as well as PED
4.9 Barriers to development	commodity price volatility
3.7 Supply-side policies	policies that raise the elasticity of supply

24 Exam-style question with markscheme

Try this under exam conditions (about 15 minutes) before reading the markscheme.

Figure 5. House prices and new homes completed in a city.

Text A. Demand for housing in the city has risen sharply as people move in for new technology jobs. Builders say they cannot keep up because of a shortage of land and long delays in getting planning permission.

(a) Define price elasticity of supply. [2]

(b) Calculate PES for new homes between 2021 and 2022. [2]

(d) Explain one policy that could increase the elasticity of housing supply. [2]

Markscheme

Part	Answer	Marks
(a)	responsiveness of quantity supplied	A1
	to a change in the good's price	A1
(b)	%ΔQs ≈ 1%, %ΔP = 25%	M1
	PES = 0.04	A1
(c)	diagram: steep (inelastic) supply; demand shifts right; large price rise	A1
	rising demand from in-migration	R1
	supply inelastic: land shortage, planning delays	R1
	price rises more than quantity	R1
(d)	e.g. release public land / simplify planning	A1
	builders can respond faster to price rises	R1

Examiner's comments. In (b), many candidates divided price by quantity. In (c), the best answers drew a steep supply curve and explained why it is steep, using the text.

25 Check your understanding

Section A: multiple choice

1. PES measures

A. the responsiveness of quantity supplied to a change in price B. the change in demand C. the change in costs D. the change in income

2. If price rises 20% and quantity supplied rises 10%, PES is

A. 2 B. −0.5 C. 0.5 D. 10

3. A straight supply curve through the origin has PES

A. 0 B. equal to 1 C. infinity D. less than 1

4. Which makes supply more elastic?

A. a long production period B. immobile factors C. perishable goods D. large stocks and spare capacity

5. Supply of seats at a sold-out concert is

A. perfectly elastic B. perfectly inelastic C. unit elastic D. elastic

6. Supply tends to be more elastic

A. in the long run B. in the momentary period C. when factors are immobile D. for perishable goods

7. Low PES for primary products contributes to

A. stable prices B. high YED C. low tax revenue D. large price fluctuations

8. If PES = 0.4 and price rises 25%, quantity supplied rises by

A. 4% B. 25% C. 10% D. 62.5%

Section B: structured

9. Explain three determinants of PES. [6]

10. Explain why the supply of manufactured goods is usually more elastic than the supply of primary products. [4]

11. Using a diagram, explain the effect of a rise in demand when supply is perfectly inelastic. [3]

Answers

1. A 2. C 3. B 4. D 5. B 6. A 7. D 8. C

9. Spare capacity (quick response), stocks (can release goods), time (long run more elastic), with explanation.

10. Factories add shifts, hold stocks and switch production; crops and mines need long production periods and depend on weather.

11. Vertical supply; demand shifts right; price rises by the full amount; quantity unchanged.

26 Summary and topic map

Idea	Remember
PES	%ΔQs ÷ %ΔP; positive
Elastic / inelastic	PES > 1 / < 1
Straight-line rule	cuts price axis: elastic; cuts quantity axis: inelastic; through origin: 1
Determinants	spare capacity, stocks, factor mobility, production period, time
Time	momentary 0, short run inelastic, long run more elastic
Applications	commodity volatility, housing prices

Before the exam, make sure you…

•show the PES formula with quantity on top
•use the axis-intercept rule for straight lines
•explain why a market's supply is elastic or inelastic using determinants
•combine PES and PED when explaining price volatility

Elasticity of Supply on one page

Cover this page with a sheet of paper and try to rebuild it from memory. Whatever you can't recall is what to revise next.

Figure 6. Topic map for Elasticity of Supply.

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