Edexcel IAL Economics: Supply and price elasticity of supply (YEC11) – Revision Notes

These notes condense section 1.3.3 (Supply), items 1 and 2, of the Pearson Edexcel International Advanced Subsidiary/Advanced Level Economics (YEC11) specification, Issue 2, June 2018. Unit 1, Markets in action, is an International Advanced Subsidiary (IAS) unit and its content also counts towards the full International Advanced Level.

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The figures here are made up for revision.

Key definitions (1a, 1b, 2a)

Term	Meaning
Supply	Amount firms are prepared and able to sell at each price over a stated time
Extension / contraction	Movement along the curve, from a change in the good’s own price alone
Increase / decrease in supply	The whole curve moves right or left because of some other factor
Price elasticity of supply (PES)	How far quantity supplied reacts when the good’s own price moves
Short run	Time in which some factor of production cannot be changed
Long run	Time in which every factor can be changed

Shift factors (1c)

Factor	Direction of shift	Reason in one line
Higher costs of production	Left (up)	Each unit costs more, so less is profitable at each price
Lower costs of production	Right (down)	Each unit costs less
New technology	Right	Lower unit costs or more output per input
Specific indirect tax	Left, parallel	Fixed sum per unit added to cost
Ad valorem indirect tax	Left, pivots steeper	Percentage of price, so gap widens as price rises
Subsidy	Right (down)	Payment cuts net cost per unit
Natural disaster	Left	Stock, land or capital destroyed or disrupted

Method: explaining a shift in four steps.

1. Name the factor and say which cost or output it affects.
2. State the effect on unit cost or profitability at each price.
3. State the direction of the supply curve shift.
4. State the effect on equilibrium price and quantity if demand is unchanged: a left shift raises price and cuts quantity; a right shift lowers price and raises quantity.

Small reminder. A supplier needs 5 coins to supply 30 units and 9 coins to supply 90 units. A specific tax of 3 coins makes those 8 and 12, a gap of 3 each time, so the curve shifts in parallel. An ad valorem tax of 20% makes them 6.00 and 10.80, gaps of 1.00 and 1.80, so the curve pivots and becomes steeper.

Must-know distinctions

Pair	Difference
Extension vs increase	Extension is a move along the curve (price changed). Increase is a shift right (something else changed)
Specific vs ad valorem	Fixed sum per unit vs percentage of price. Parallel shift vs pivot
Tax vs subsidy	Tax raises cost and shifts supply left. Subsidy lowers net cost and shifts supply right
Slope vs elasticity	Slope uses absolute changes. PES uses percentage changes
Short run vs long run	Some factor fixed vs all factors variable. Not set lengths of time
Inelastic vs perfectly inelastic	PES between 0 and 1 vs exactly 0

PES formula and interpretation (2a, 2b)

PES = % change in quantity supplied / % change in price
% change = (final - start) / start x 100

PES	Description	Meaning
0	Perfectly inelastic	Quantity does not respond to price
Between 0 and 1	Inelastic	Quantity moves by a smaller percentage than price
1	Unitary elastic	Same percentage change
Between 1 and infinity	Elastic	Quantity moves by a larger percentage than price
Infinity	Perfectly elastic	Producers supply any quantity at one price

Method: calculating PES in steps.

1. Find the percentage change in price using the old price as the base.
2. Find the percentage change in quantity supplied using the old quantity as the base.
3. Divide step 2 by step 1.
4. Say whether the value is above, below or equal to 1 and what that means in the context.

Worked reminder. Price rises from 8 to 10 coins and quantity from 120 to 150. Price +25%, quantity +25%, so PES = 1.0, unitary. Another case: price from 40 to 50 coins and quantity from 200 to 210. Price +25%, quantity +5%, so PES = 0.2, inelastic. A third: price from 60 to 54 and quantity from 90 to 72. Price -10%, quantity -20%, so PES = 2.0, elastic.

Straight-line shortcuts.

• Through the origin: PES = 1 everywhere.
• Meets the price axis first: PES above 1 everywhere.
• Meets the quantity axis first: PES below 1 everywhere.
• For Q = 8P - 16 the line meets the price axis first. At P = 6, Q = 32, so PES = 8 x 6/32 = 1.5; at P = 10, Q = 64, so PES = 8 x 10/64 = 1.25.
• For Q = 6P + 30 the line meets the quantity axis first. At P = 5, Q = 60, so PES = 6 x 5/60 = 0.5.

Factors affecting PES (2c)

Factor	High PES when	Low PES when
Time period	Longer time to adjust	Very short time
Stock / perishability	Durable, stored stock can be released	Perishable, cannot be stored
Mobility of factors	Labour and capital switch easily	Specialist workers or machines
Legal constraints	Few licences, quotas or limits	Planning rules, quotas or caps bind
Capacity	Spare capacity available	Operating near full capacity

Short run versus long run (2d)

• Short run: some factor cannot be changed, so extra output comes from variable factors only, and PES is lower.
• Long run: all factors variable, new capacity can be built or firms can enter, so PES is higher.
• The two periods are not fixed lengths of time. They depend on the industry.
• Example: a 25% price rise leads to +0%, +10% and +40% output at the market period, short run and long run. PES is 0, 0.4 and 1.6.

Chains of reasoning and evaluation

Why elastic supply helps. A demand increase meets a larger output rise and a smaller price rise. Consumers benefit from stable prices and firms can expand.

Why inelastic supply hurts consumers. A demand increase causes a large price rise and little extra output. Shortages persist and producers earn higher profits for a time.

Evaluation prompts.

• Is the time period short or long?
• Is there spare capacity or stock?
• Are legal limits in place?
• Is the PES value measured over the whole range of the curve or at one point?
• Do firms expect the price rise to last? If not, they may not invest.

Quick self-test

1. State two non-price causes of an increase in supply.
2. Price rises from 25 to 30 coins and quantity supplied rises from 300 to 345. Calculate PES.
3. What does a PES of 0 mean?
4. Why does an ad valorem tax pivot the supply curve rather than shift it in parallel?
5. A firm makes 900 units with capacity of 1,000. What is the largest percentage rise in output it can achieve without new capacity?
6. Price falls from 50 to 45 and quantity supplied falls from 800 to 700. Calculate PES.
7. A supply curve is Q = 5P. What is PES at P = 7?
8. Give two reasons why fresh fish has a lower PES than tinned fish.
9. A government pays a subsidy to bakeries. Which way does the supply curve shift?
10. Why is PES usually higher in the long run?

Answers

1. Any two: lower input costs, new technology, a subsidy, removal of an indirect tax. A natural disaster causes a fall in supply.
2. Price +20%, quantity +15%, so PES = 15/20 = 0.75.
3. Quantity supplied does not change when price changes. The curve is vertical.
4. The tax is a percentage of price, so the vertical gap widens as price rises.
5. (1,000 - 900)/900 = 11.1%.
6. Price -10%, quantity -12.5%, so PES = 1.25.
7. The line passes through the origin, so PES = 1 (5 x 7/35 = 1).
8. It is perishable so it cannot be stored, and the catch cannot be raised quickly when price rises.
9. Right (down), because the payment lowers net cost per unit.
10. All factors can be varied, so firms can build capacity, retrain workers and new firms can enter.

Where marks are usually lost

• Calling a rise in the good’s own price a “shift” instead of an extension.
• Calculating percentage change from the new value.
• Giving PES with the wrong sign because only one change was treated as negative.
• Saying an ad valorem tax shifts supply in parallel.
• Describing PES as “slope” and so ignoring the percentages.
• Not linking PES to a determinant in the context given.
• Making a short run and long run claim with no reason, such as fixed capital.
• Evaluating with no judgement, for example listing factors without saying which matters most.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics (YEC11), Specification, Issue 2, June 2018, section 1.3.3 Supply, items 1 and 2. Published by Pearson Education Limited.