Pearson Edexcel International Advanced Level Economics: Supply and price elasticity of supply (YEC11)

This guide covers 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. Section 1.3.3 sits in Unit 1, Markets in action. The specification labels Unit 1 as an International Advanced Subsidiary (IAS) unit, and its content also counts towards the full International Advanced Level. The extra content for the full qualification is called International A2 (IA2) in the specification.

Use the Edexcel A Level Economics hub for all topics and the printable checklist to tick off outcomes. Not sure where you stand? Try the free 10-minute diagnostics. After this guide, use the revision notes and the practice questions.

Every number below is made up for teaching and is not a real statistic.

What this guide covers

Item	What you must be able to do
1a	Explain the concept of supply
1b	Distinguish a movement along a supply curve from a shift
1c	Explain shifts caused by costs of production, new technology, indirect taxes (specific and ad valorem), subsidies and natural disasters
2a	Explain the concept of price elasticity of supply (PES)
2b	Calculate PES and interpret perfectly elastic, elastic, unitary, inelastic and perfectly inelastic values
2c	Explain the factors that influence PES: time period, stock and perishability, mobility of factors of production, legal constraints, capacity
2d	Distinguish the short run from the long run and link the distinction to PES

1a and 1b Supply, movements and shifts

Supply is the amount of a good or service that firms are prepared and able to bring to market at each possible price over a stated time. The supply curve slopes upwards because a higher price makes extra output profitable. Producers face rising marginal costs as they expand, so they need a higher price to cover them.

A movement along the curve happens only when the good’s own price alters. Any other factor makes the whole curve shift. After a shift, producers offer a different quantity at every price.

Event	Curve	Terms to use
Price of the good rises	Same curve	Extension of supply
Price of the good falls	Same curve	Contraction of supply
Non-price factor makes supply more profitable	Shifts right	Increase in supply
Non-price factor makes supply less profitable	Shifts left	Decrease in supply

Be careful with direction. A right shift is also a shift down: producers will accept a lower price for the same quantity. A left shift is also a shift up.

1c Factors that shift supply

Costs of production. Higher wages, raw material prices or energy prices raise cost per unit, so supply falls (shifts left). Lower costs shift it right.

New technology. Technology that raises output per worker or cuts waste lowers unit costs, so supply increases. Machinery that lets a bakery bake more loaves per hour is one example.

Natural disasters. A flood or drought can destroy stock, farmland or factories. Supply falls sharply and may take years to recover if capital was destroyed.

Indirect taxes. An indirect tax is levied on spending but handed to the government by the seller. To the producer it is an extra cost, so supply shifts left (up). There are two types.

• A specific tax is a fixed sum on each unit. The new curve is parallel to the old one, because the vertical gap is the same at every quantity.
• An ad valorem tax is a set percentage of the price. The vertical gap grows as price rises, so the new curve is steeper and the two curves move further apart at higher prices.

Worked example 1: a tax on notebooks. The original supply schedule is Q = 10P - 20 (price in coins, quantity in thousands).

Quantity (thousands)	Original supply price	With specific tax of 2 coins	With ad valorem tax of 25%	Gap for the 25% tax
20	4.00	6.00	5.00	1.00
40	6.00	8.00	7.50	1.50
60	8.00	10.00	10.00	2.00
80	10.00	12.00	12.50	2.50
100	12.00	14.00	15.00	3.00

Working for 80 thousand: the producer needs 10 coins to supply that quantity. A specific tax adds 2, giving 12. A 25% tax adds 0.25 x 10 = 2.50, giving 12.50. The specific gap stays at 2 whereas the ad valorem gap rises from 1.00 to 3.00, so the ad valorem curve pivots upwards.

Subsidies. A subsidy is money the government pays to producers. It cuts net cost per unit, so supply shifts right (down). A per-unit subsidy of 1.50 coins on notebooks lowers the price producers need at each quantity: 20 thousand needs 2.50 rather than 4.00, and 100 thousand needs 10.50 rather than 12.00.

2a Price elasticity of supply

Price elasticity of supply (PES) shows how strongly the quantity producers offer reacts when the good’s own price moves.

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

Worked example 2: a price rise. A dairy sells cheese. The price rises from 5.00 to 5.50 coins and weekly quantity supplied rises from 800 to 860 units.

% change in price    = (5.50 - 5.00) / 5.00 x 100 = +10%
% change in quantity = (860 - 800) / 800 x 100    = +7.5%
PES = 7.5 / 10 = 0.75

A 1% rise in price brings a 0.75% rise in quantity supplied. Supply is inelastic.

Worked example 3: a price fall. For a different good the price falls from 20 to 18 coins and quantity supplied falls from 500 to 425.

% change in price    = (18 - 20) / 20 x 100  = -10%
% change in quantity = (425 - 500) / 500 x 100 = -15%
PES = -15 / -10 = 1.5

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

2b Interpreting values

PES	Description	Supply curve
0	Perfectly inelastic	Vertical
Between 0 and 1	Inelastic	Steep
Exactly 1	Unitary elastic	Straight line through the origin
Between 1 and infinity	Elastic	Flat
Infinity	Perfectly elastic	Horizontal

Slope alone does not give PES. On a straight-line curve, PES changes along the line, because the same absolute change is a smaller percentage of a bigger quantity. These rules help:

• Any straight line from the origin gives PES = 1 at each of its points.
• A straight line that cuts the price axis before it reaches the quantity axis has PES above 1 throughout.
• A straight line that cuts the quantity axis first has PES below 1 throughout.

Worked example 4: PES at a point. For Q = 10P - 20, a 1-coin rise in price raises quantity by 10 thousand. At P = 10, Q = 80. A 1-coin rise is +10% and 10 thousand is +12.5%, so PES is about 1.25. Using the formula (change in Q over change in P) x (P over Q) gives 10 x 10/80 = 1.25. At P = 6 it is 10 x 6/40 = 1.5, and at P = 12 it is 10 x 12/100 = 1.2. PES falls as you move up the curve but stays above 1 because the line meets the price axis first.

2c Factors that influence PES

• Time period. Firms cannot change output quickly. The longer the time, the more they can adjust, so PES rises with time.
• Stock and perishability. If a firm holds stocks of finished goods, it can release them when price rises, so supply is elastic. Fresh fruit, cut flowers and fresh fish perish, so they cannot be stored and PES is low.
• Mobility of factors of production. If workers and machines switch easily between uses, producers can move into the good that is now more profitable. Specialist labour and machinery that suits only one task lower PES.
• Legal constraints. Planning rules, licences, quotas and working-time limits restrict how fast output can rise. Where they bind, supply is inelastic.
• Capacity. A firm with spare capacity can raise output with little extra cost, so PES is high. A firm already close to full capacity must build or buy more capital, so PES falls towards zero.

Worked example 5: capacity. A factory has capacity of 1,000 units and makes 900. Output can rise at most (1,000 - 900)/900 = 11.1% without new equipment. If price rises 10%, PES is up to about 1.1 in the short run. If price rises 25%, it cannot reach 25% more output, so PES in the short run is no more than 0.44.

2d Short run and long run

In economics the short run is the time during which one or more factors of production, usually capital or land, cannot be changed. The long run is the time over which every factor can be varied. These are not set numbers of weeks or years: for a street stall the long run may be a month, for a power station it may be many years.

Worked example 6: an orchard. Suppose a 20% rise in the price of apples. The table shows illustrative responses.

Period	Extra quantity supplied	PES
Immediate (market period)	0%	0 / 20 = 0
One season	8%	8 / 20 = 0.4
Five years	36%	36 / 20 = 1.8

Immediately, the crop is already picked, so supply is fixed. Within a season, only workers and pickers can be added. After five years, new trees are planted, so output can expand far more. Supply is more elastic in the long run.

Why PES matters: a demand shift

Suppose demand rises by 28 thousand at every price in two markets that start at price 10 and quantity 80. In market X supply is Q = 10P - 20 (PES 1.25 at the start). In market Y supply is Q = 4P + 40 (PES 0.5 at the start). Demand moves from Q = 120 - 4P to Q = 148 - 4P.

Market	New price	% rise in price	New quantity	% rise in quantity
X (elastic)	12.00	20%	100	25%
Y (inelastic)	13.50	35%	94	17.5%

When supply is inelastic, a given demand increase produces a bigger price rise and a smaller output rise. Evaluate by asking how long the period is and what spare capacity or stocks there are.

Common errors

• Writing “supply increases” when only the price of the good has changed. Use extension or contraction.
• Showing an indirect tax as a movement along the supply curve. A tax changes costs, so the whole curve shifts left.
• Drawing an ad valorem tax as a parallel shift.
• Calculating percentage change using the new value as the base.
• Describing PES of 0.6 as “inelastic, so a small response” without saying that quantity rises by 0.6% for each 1% price rise.
• Giving a PES value without stating the time period it refers to.

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.