Cambridge A Level Economics: Price elasticity of supply and consumer and producer surplus (9708)

This guide covers sections 2.3 (Price elasticity of supply) and 2.5 (Consumer and producer surplus) of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Both sit in topic 2, which is AS Level content. A Level candidates study it too, and the syllabus treats it as assumed knowledge for A Level Papers 3 and 4. Every firm, market and figure below is invented for illustration. None is a real statistic, and money is in currency units (cu).

Go to the Cambridge A Level Economics hub for all topics, or tick off outcomes on the printable checklist. Then use the revision notes and the practice questions. Unsure where you stand? Take a free 10-minute diagnostic. For the rest of topic 2, see the price system study guide.

What this guide covers

Section	What you must be able to do
2.3.1	Define price elasticity of supply (PES)
2.3.2	Use the formula and calculate PES
2.3.3	Explain what the size and sign of the coefficient show about relative percentage changes
2.3.4	Explain the factors affecting PES
2.3.5	Explain what PES means for how quickly and easily firms react to changed market conditions
2.5.1	Explain the meaning and significance of consumer surplus
2.5.2	Explain the meaning and significance of producer surplus
2.5.3	Explain the causes of changes in consumer and producer surplus
2.5.4	Explain how price elasticity of demand and of supply decide the extent of those changes

2.3.1 and 2.3.2 Defining and calculating PES

Price elasticity of supply (PES) shows how far firms change the quantity they supply when the price of that good alone changes.

PES = % change in quantity supplied / % change in price
percentage change = (final - starting value) / starting value x 100

Example 1 (price rise). A pottery workshop sells mugs. The price rises from 8.00 cu to 9.20 cu and weekly output rises from 200 to 224.

% change in price    = (9.20 - 8.00) / 8.00 x 100 = +15%
% change in quantity = (224 - 200) / 200 x 100   = +12%
PES = 12 / 15 = 0.8

Quantity supplied rises by 0.8% for each 1% rise in price. Supply is inelastic.

Example 2 (price fall). The price of a different good falls from 20 cu to 17 cu and quantity supplied falls from 500 to 410.

% change in price    = (17 - 20) / 20 x 100  = -15%
% change in quantity = (410 - 500) / 500 x 100 = -18%
PES = -18 / -15 = 1.2

Both changes are negative, so the PES is positive. Supply is elastic.

2.3.3 Size and sign

The coefficient tells you whether quantity supplied changes by a larger or smaller percentage than price.

PES value	Description	Meaning
0	Perfectly inelastic	Quantity does not change. Vertical supply curve
Between 0 and 1	Inelastic	Quantity moves proportionately less than price
Exactly 1	Unitary	Quantity and price change by the same percentage
Greater than 1	Elastic	Quantity moves proportionately more than price
Infinity	Perfectly elastic	Firms supply any amount at one price. Horizontal supply curve

Sign. For most goods price and quantity supplied move in the same direction, so PES is positive. A negative value means quantity supplied moves the opposite way to price.

Example 3. A worker is offered a rise in hourly pay from 12 cu to 15 cu and cuts weekly hours from 40 to 38.

% change in price (pay) = (15 - 12) / 12 x 100 = +25%
% change in quantity    = (38 - 40) / 40 x 100 = -5%
PES = -5 / 25 = -0.2

The negative sign shows that this worker now supplies less labour at the higher pay. The size, 0.2, shows a weak response.

Straight-line supply curves. Where a straight supply curve starts decides the size of its PES:

Supply curve	PES
Passes through the origin	Exactly 1 at every point
Meets the price axis (positive price, zero quantity)	Greater than 1 at every point
Meets the quantity axis (positive quantity at zero price)	Less than 1 at every point

Test with price rising from 10 cu to 12 cu (+20%) on three curves:

Qs = 20P:       200 -> 240 = +20%  -> PES 1.0
Qs = 20P - 100: 100 -> 140 = +40%  -> PES 2.0
Qs = 20P + 100: 300 -> 340 = +13.3% -> PES 0.67

A steeper-looking line is not always less elastic. Elasticity compares percentage changes, so the slope alone does not decide it. Two parallel lines can have different PES at the same price.

2.3.4 Factors affecting PES

• Spare capacity. Firms with idle machinery and workers can raise output quickly, so supply is more elastic.
• Stocks. A firm holding finished goods can sell more at once. Perishable goods cannot be stored, which makes supply less elastic.
• Ease of switching resources. Where labour and equipment move easily to making the good, supply is elastic. Specialised factors make it inelastic.
• Time period. Supply is more elastic the longer firms have to respond. They can hire, build and train.
• Production time. Goods that take long to produce, such as tree crops, respond slowly.
• Ease of entry. If new firms can enter the market easily, market supply is more elastic in the long run.
• Availability of inputs. A shortage of key materials or skilled workers limits how far output can rise.

2.3.5 Speed and ease of reaction

PES shows how fast and how easily firms can react when price signals a change in conditions. Economists use three time frames:

• Momentary: nothing can change, so supply is perfectly or almost perfectly inelastic.
• Short run: at least one factor is fixed, so firms can only use spare capacity and stocks.
• Long run: all factors can change, so supply is most elastic.

Example 4. Grower B sees the price of its fruit rise by 20%. Output rises by 0% at once, by 6% in the following season and by 36% after five years.

momentary: 0 / 20  = 0.0
short run: 6 / 20  = 0.3
long run:  36 / 20 = 1.8

The same market moves from perfectly inelastic to elastic as time passes.

Implications. If PES is low, a rise in demand cannot be met quickly. Shortages last and price rises sharply, which gives firms a strong signal but a slow reward. If PES is high, output expands with little price change. Firms with low PES gain from keeping stocks, spare capacity or flexible workers. Governments that want faster output responses can focus on training, transport and information, which make resources easier to move.

2.5.1 and 2.5.2 Consumer and producer surplus

Consumer surplus is the gap between the highest price consumers would pay and the price they do pay, added up over every unit bought. On a diagram it is the area beneath the demand curve and over the price line.

Producer surplus is the gap between the price producers receive and the lowest price they would have accepted, added up over every unit sold. On a diagram it is the area over the supply curve and beneath the price line.

The two together are total surplus (community surplus). Example 5 uses Market N: demand Qd = 1,000 - 10P and supply Qs = 20P - 200. Demand meets the price axis at 100 cu and supply meets it at 10 cu.

Equilibrium: 1,000 - 10P = 20P - 200  ->  P = 40 cu, Q = 600
Consumer surplus = 1/2 x (100 - 40) x 600 = 18,000 cu
Producer surplus = 1/2 x (40 - 10) x 600  =  9,000 cu
Total surplus    = 27,000 cu

Significance. Consumer surplus is a measure of the benefit consumers gain beyond what they pay. Producer surplus shows the reward to producers above their minimum cost, and so relates to profit. Total surplus is largest at the competitive equilibrium, so a fall in it points to inefficiency. Economists use changes in surplus to judge who gains and loses from market events and policies.

Limits. Willingness to pay depends on income, so surplus ignores who is rich or poor. Demand and supply curves are hard to measure in practice, so surplus figures are estimates.

2.5.3 Causes of changes in surplus

Anything that shifts demand or supply, or changes the price paid or received, changes surplus.

Increase in supply (cost falls). In Market N a new technique cuts cost so that supply becomes Qs = 20P - 80 and the minimum price is 4 cu.

1,000 - 10P = 20P - 80  ->  P = 36 cu, Q = 640
Consumer surplus = 1/2 x (100 - 36) x 640 = 20,480 cu  (up 2,480)
Producer surplus = 1/2 x (36 - 4) x 640   = 10,240 cu  (up 1,240)

Increase in demand (income rises). Demand becomes Qd = 1,300 - 10P, with the original supply.

1,300 - 10P = 20P - 200  ->  P = 50 cu, Q = 800
Consumer surplus = 1/2 x (130 - 50) x 800 = 32,000 cu  (up 14,000)
Producer surplus = 1/2 x (50 - 10) x 800  = 16,000 cu  (up 7,000)

Consumer surplus rose even though price rose, because consumers value the good more.

A per-unit tax of 12 cu on producers shifts supply up by 12 cu: Qs = 20(P - 12) - 200.

1,000 - 10P = 20P - 440  ->  P = 48 cu, Q = 520
Consumers pay 48: consumer surplus = 1/2 x 52 x 520 = 13,520 cu
Producers keep 36: producer surplus = 1/2 x 26 x 520 =  6,760 cu
Tax revenue = 12 x 520 = 6,240 cu
Loss of total surplus = 27,000 - (13,520 + 6,760 + 6,240) = 480 cu

The 480 cu is lost because 80 units that were worth making are no longer traded. Other causes include a price ceiling or price floor, a subsidy, or a change in the number of buyers or sellers.

2.5.4 The role of PED and PES

For a given shift, the price change and quantity change depend on the elasticity of the other curve.

Demand rises by 300 units at every price (Markets P and Q). Both start at 40 cu and 600 units, with Qd = 1,000 - 10P, then demand becomes Qd = 1,300 - 10P.

	Elastic supply (PES 3.3 at the start)	Inelastic supply (PES 0.33 at the start)
New price, quantity	45 cu, 850	60 cu, 700
Change in producer surplus	+3,625 cu	+13,000 cu
Change in consumer surplus	+18,125 cu	+6,500 cu

Working for the first column: producer surplus rises by (45 - 40) x (600 + 850) / 2 = 3,625.

Supply rises (costs fall by 10 cu a unit; Markets R and S). Both start at 40 cu and 600 units. R has inelastic demand (PED 0.33, Qd = 800 - 5P) and S has elastic demand (PED 2, Qd = 1,800 - 30P). Supply becomes Qs = 20P.

	Inelastic demand	Elastic demand
New price, quantity	32 cu, 640	36 cu, 720
Change in consumer surplus	+4,960 cu	+2,640 cu
Total revenue	24,000 to 20,480 cu	24,000 to 25,920 cu

Chain of reasoning. The more inelastic the curve that does not shift, the larger the price change. A large price change moves surplus between consumers and producers more. The more elastic that curve, the larger the quantity change, so more trade takes place and the total surplus gain from extra units is larger.

Evaluation. Elasticity varies over time and along a curve, so the extent of change in the short run can differ from the long run. These are estimates from straight-line curves. Real curves are rarely straight.

Common errors

• Using the new value as the base when working out a percentage change.
• Dividing price change by quantity change, which gives the reciprocal.
• Dropping the sign of PES or describing a value of 1.2 as inelastic.
• Saying a steeper supply curve always has lower PES.
• Shading consumer surplus below the price, or producer surplus above it.
• Forgetting to halve base times height for a triangle.
• Saying consumer surplus must fall whenever price rises, even when demand has risen.
• Giving a factor affecting PES without saying why it makes supply more or less elastic.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, sections 2.3 and 2.5 (Cambridge University Press & Assessment).