Cambridge O Level Economics: Price elasticity of supply: calculation, determinants and significance (2281)

This guide teaches section 2.8 (sub-sections 2.8.1 to 2.8.4) of the Cambridge O Level Economics (2281) syllabus for examination in 2026, version 2: price elasticity of supply (PES). This syllabus has no tiers, so all of it applies to every candidate. Every firm, market, country and number below is invented for practice and is not a real statistic.

Related pages: the revision notes, the practice questions, the wider Allocation of Resources study guide, the Cambridge O Level Economics hub, the printable checklist and the free diagnostics.

What you must be able to do

Section	Outcome
2.8.1	Give a definition of PES
2.8.2	Work out PES with the formula, interpret the result, and draw and read supply curves showing different values
2.8.3	Explain the key influences on whether supply is elastic or inelastic
2.8.4	Explain what PES means for decision making by consumers, producers and government

2.8.1 Defining PES

Price elasticity of supply (PES) measures how far the quantity supplied of a good responds when its price changes. If a small price rise brings a big rise in output, supply is elastic. If a big price rise brings only a small rise in output, supply is inelastic.

In a definition, use the words “responsiveness”, “quantity supplied” and “price”. Do not write that PES is “how much firms supply”. A firm can supply a lot and still be unable to change its output quickly.

2.8.2 Working out and reading PES

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

% change = (new value - original value) / original value x 100

Always use the original value as the base. Because supply curves normally slope upward, price and quantity move the same way, so PES is positive. If your answer comes out negative, you have probably mixed up a sign.

Worked example 1 (inelastic). A small bakery in Town A (illustrative) sees the price of a loaf rise from 3.00 to 3.45. It raises output from 400 to 436 loaves a day.

% change in price    = (3.45 - 3.00) / 3.00 x 100 = +15%
% change in quantity = (436 - 400) / 400 x 100    = +9%
PES = 9 / 15 = 0.6

PES is 0.6, which is less than 1, so supply is inelastic. Quantity supplied rises by 0.6% for every 1% rise in price.

Worked example 2 (elastic, price falls). A craft workshop (illustrative) sees price fall from 8.00 to 7.00 a unit and cuts output from 800 to 680 units.

% change in price    = (7.00 - 8.00) / 8.00 x 100 = -12.5%
% change in quantity = (680 - 800) / 800 x 100    = -15%
PES = -15 / -12.5 = 1.2

The two negatives cancel, so PES is 1.2. This is more than 1, so supply is elastic.

Worked example 3 (unitary). Price rises from 50 to 55 (+10%) and output from 300 to 330 (+10%). PES = 10 / 10 = 1, which is unitary elasticity.

Reading the number

PES	Description	Meaning
0	Perfectly inelastic	Output stays fixed whatever happens to price
Between 0 and 1	Inelastic	The percentage rise in output is smaller than the percentage rise in price
1	Unitary	Output and price change by equal percentages
Above 1	Elastic	Output changes by a bigger percentage than price
Infinite	Perfectly elastic	Firms will supply any amount at one price and none below it

Using PES backwards

If you know PES and the price change, you can find the quantity change.

Worked example 4. A market (illustrative) has PES of 1.5. Price rises 8%. Output is 2,400 units.

% change in quantity = PES x % change in price = 1.5 x 8 = +12%
New quantity = 2,400 x 1.12 = 2,688 units

You can also find the price change needed to get a target output. If PES is 0.3 and a government wants output to rise by 9%, price must rise by 9 / 0.3 = 30%.

Supply curve diagrams

On a supply diagram, price is on the vertical axis and quantity supplied is on the horizontal axis. Each curve below slopes upward from left to right unless stated.

Curve A: upright line     Curve B: level line      Curve C: ray from corner
P |      |                P |                       P |           /
  |      |                  |_____________            |         /
  |      |                  |                         |       /
  +-------- Q               +--------------- Q        +/-------------- Q
  PES = 0                   PES is infinite             PES = 1 throughout

The test for a straight-line supply curve is where it meets an axis, not how steep it looks.

Straight line meets	PES at every point	Example (price 10 to 11)
The origin	1	Q = 3P: quantity 30 to 33 (+10%), PES = 10 / 10 = 1
The quantity axis (positive intercept)	Less than 1	Q = 20 + 2P: quantity 40 to 42 (+5%), PES = 5 / 10 = 0.5
The price axis (positive price at zero output)	More than 1	Q = 2P - 8: quantity 12 to 14 (+16.7%), PES = 16.7 / 10 = 1.67

For two curves through the same point, the flatter one is the more elastic. Steepness alone is not PES, because it depends on the scale of the axes. Compare shapes only on the same diagram.

2.8.3 Determinants of PES

The syllabus asks for the key influences on whether supply is elastic or inelastic. These are the standard ones. Each answer needs a reason: say how the factor affects how quickly and cheaply firms can raise output.

1. Spare capacity. A firm whose machines and staff are not fully used can lift output almost at once when price rises. A firm already working flat out cannot. Worked check: a factory (illustrative) makes 800 units a week and can make up to 1,000. A 5% price rise raises output by 20% to 960, which is within capacity, so PES = 20 / 5 = 4. If it already made 1,000, extra output would need new machines and PES would be much lower.
2. Stocks of finished goods. A firm holding stocks can release them when price rises. A perishable good cannot be stored, so supply is less elastic.
3. Time. Given longer, firms can expand their plant, recruit and train staff, and new competitors can start up, so supply becomes more elastic. Worked check: the same market (illustrative) has output of 500 units. A 10% price rise raises output by 1% in the short run (PES 0.1) and by 20% after two years (PES 2.0).
4. Ease of switching factors of production. If workers and equipment can be moved from one product to another, firms can move into the product whose price has risen. Specialised labour and machines make supply less elastic.
5. Availability of raw materials and other inputs. If inputs are scarce or slow to obtain, output cannot rise quickly. Easily available inputs make supply more elastic.
6. Length of the production process. Goods that take a long time to make or grow, such as tree crops, respond slowly to a price rise. Goods made in hours respond quickly.

2.8.4 Why PES matters

The effect of a rise in demand depends on PES. Worked example 5. In two markets (illustrative), demand rises and the starting price is 10 with quantity 100. Demand then increases by 24 units at every price. In Market X, supply follows Q = 100 + 4(P - 10). In Market Y, it follows Q = 100 + 40(P - 10). Before the rise, demand is Q = 300 - 20P.

New demand: Q = 324 - 20P
Market X: 100 + 4P - 40 = 324 - 20P  ->  24P = 264  ->  P = 11,    Q = 104
Market Y: 100 + 40P - 400 = 324 - 20P -> 60P = 624  ->  P = 10.4, Q = 116

Market X: price +10%, quantity +4%,  PES = 0.4
Market Y: price +4%,  quantity +16%, PES = 4

The same rise in demand causes a large price rise and a small output rise where supply is inelastic, and a small price rise and a large output rise where supply is elastic.

Consumers. Where supply is inelastic, a rise in demand raises prices sharply and consumers get little extra output. Where supply is elastic, prices rise less and more of the good becomes available. A shortage of an inelastic product may last until supply can adjust.

Producers. A firm with elastic supply can respond to a higher price by growing output fast and winning extra sales. A firm with inelastic supply cannot, so rivals may take those sales. Firms weigh PES when deciding how much spare capacity to keep, how much stock to hold and whether to invest in flexible machinery.

Government. A government that wants more output of a good needs to know PES. If supply is inelastic, a subsidy shifts supply to the right but adds little to output in the short run, and the price falls by more than the quantity rises, so the policy may disappoint while still costing the government money. If the product has inelastic supply, such as one that takes years to grow, measures that expand capacity or training may work better than a price signal. A government setting a maximum price on a good with inelastic supply can create a persistent shortage, because firms cannot expand output to match demand.

Evaluation points. PES is not fixed. It depends on the time period and on current capacity, so a figure calculated today may not hold after a year. Measures of price and quantity changes also depend on the period chosen. A good answer says which time period it assumes.

Common errors

• Writing price over quantity in the formula. Quantity supplied goes on top.
• Using the new value as the base of a percentage. Use the original.
• Calling a result of 1 “elastic”. It is unitary.
• Saying a supply curve is elastic because it looks steep. Check where it meets the axes.
• Giving a determinant without a reason. “Time” earns nothing unless you add that firms can adjust capacity.
• Mixing PES determinants with PED determinants, such as substitutes.
• Discussing significance without naming who is affected and how.

Official syllabus

Cambridge O Level Economics (2281) syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment: section 2.8 Price elasticity of supply (PES), covering 2.8.1 definition, 2.8.2 calculation, 2.8.3 determinants and 2.8.4 significance.