IB DP Economics: Elasticity of supply

This guide follows the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. It covers sub-topic 2.6 Elasticity of supply in Unit 2 Microeconomics. Almost all of it is SL and HL content. One point, why primary commodities usually have a lower price elasticity of supply than manufactured goods, is HL only.

Related pages: the revision notes, the practice questions, the IB DP Economics hub and the printable checklist. The supply curve itself is covered in demand, supply and market equilibrium. Before you start, a quick diagnostics check shows where you stand.

What the guide asks you to know

Content	What you must be able to do	Level
Price elasticity of supply (PES)	State and use the formula, and calculate PES from data	SL and HL
Degrees of PES	Describe the theoretical range of values, from zero to infinity	SL and HL
Diagrams	Draw relatively elastic and relatively inelastic supply, and constant PES: perfectly elastic, perfectly inelastic and unitary	SL and HL
Calculations	Find PES, or find the change in price or quantity supplied from data given	SL and HL
Determinants	Time, mobility of factors of production, unused capacity, ability to store, rate at which costs increase	SL and HL
Primary commodities	Explain why their PES is generally lower than for manufactured products	HL only

The guide lists this sub-topic at the application and analysis level (AO2) with calculation and diagram skills (AO4). So expect to explain, apply and calculate, not only to define.

Price elasticity of supply

PES measures how responsive the quantity supplied of a good is to a change in its price. The guide gives the formula as:

PES = %ΔQs / %ΔP, with %ΔQs the rise or fall in output as a percentage and %ΔP the same for price

Both changes are measured as percentages of the starting value:

percentage change = (new value − old value) / old value × 100

Because the supply curve slopes upward, price and quantity supplied move in the same direction. PES is therefore positive. If your answer comes out negative, you have made an arithmetic slip. This differs from price elasticity of demand, where the sign is negative.

Worked example 1: a price rise

An illustrative bakery in the fictional town of Veldor sells loaves. The price rises from 40 vels to 46 vels. Quantity supplied rises from 500 to 560 loaves a week.

• Percentage change in price = (46 − 40) / 40 × 100 = 15%
• Percentage change in quantity supplied = (560 − 500) / 500 × 100 = 12%
• PES = 12 / 15 = 0.8

A value below one means supply is relatively inelastic. Quantity supplied rises by a smaller percentage than price.

Worked example 2: a price fall

In the same fictional town, a stall’s price falls from 10 vels to 9 vels. Quantity supplied falls from 800 to 740 units.

• Percentage change in price = (9 − 10) / 10 × 100 = −10%
• Percentage change in quantity supplied = (740 − 800) / 800 × 100 = −7.5%
• PES = −7.5 / −10 = 0.75

Both changes are negative, so the ratio is positive. Keep the signs in your working.

Degrees of PES

The theoretical range runs from zero to infinity.

PES value	Description	Meaning
0	Perfectly inelastic	Output stays fixed whatever the price does
Between 0 and 1	Relatively inelastic	Output moves proportionally less than price
1	Unitary	Output moves in step with price
Greater than 1	Relatively elastic	Output moves proportionally more than price
Infinity	Perfectly elastic	Producers will supply any quantity at one price, and none below it

These are theoretical limits. Real products usually sit somewhere in the middle, and the value depends on the time period.

Diagrams

Draw Price up the side, Quantity supplied along the bottom, and name each curve S.

Relatively elastic and relatively inelastic supply

Extend a straight supply curve back until it meets an axis. If it meets the price axis above zero, supply is relatively elastic at every point. It is flatter and PES is greater than 1. If it meets the quantity axis to the right of the origin, supply is relatively inelastic at every point. PES is less than 1.

Price                       Price
  |           /  S            |         /  S
  |         /                 |        /
  |       /                   |       /
  |     /                     |      /
  |   /   (elastic)           |     /   (inelastic)
  | /                         |    /
  *------------ Quantity      +---*---------- Quantity
  starts above the origin     starts to the right of the origin
  on the price axis           on the quantity axis

Constant PES

• Perfectly inelastic: a vertical line. PES = 0.
• Perfectly elastic: a horizontal line at one price. PES = infinity.
• Unitary: a straight line that passes through the origin. PES = 1 at every point on it, whatever its steepness.

The last point surprises many people. Steepness is not the same as elasticity. A straight line through the origin can be steep or shallow and still has PES of exactly 1, because quantity and price rise in the same proportion along it. A different straight line that does not pass through the origin has a PES that changes from point to point, although it stays on one side of 1.

Calculations from data

The guide expects you to find PES, and also to find a change in price or quantity supplied when PES is given.

Worked example 3: finding the new quantity

In the fictional country of Orlan, the PES for a firm’s output of tiles is 1.5. The price rises by 8%. The firm currently supplies 2,000 tiles a month.

• Percentage change in quantity supplied = PES × percentage change in price = 1.5 × 8 = 12%
• Increase in quantity = 12% of 2,000 = 240
• New quantity supplied = 2,240 tiles

Worked example 4: finding the required price change

A fictional tea estate has a PES of 0.4. Its manager wants quantity supplied to rise by 6%. The current price is 80 vels per kilogram.

• Percentage change in price = percentage change in quantity ÷ PES = 6 ÷ 0.4 = 15%
• New price = 80 × 1.15 = 92 vels

The low PES is the reason a large price rise is needed for a small increase in output.

Worked example 5: working backwards from a result

A fictional farm raises its price from 12 to 15 vels. It increases output from 600 to 690 units.

• Price change = 3 / 12 × 100 = 25%
• Quantity change = 90 / 600 × 100 = 15%
• PES = 15 / 25 = 0.6

Method for every calculation: write the formula, work out each percentage change separately, then divide. Do not skip to the answer.

Determinants of PES

The guide lists five determinants. For each one, you should be able to say whether it raises or lowers PES and why.

Determinant	Higher PES when…	Lower PES when…
Time	There is longer to respond	The period is short, so inputs and capacity are fixed
Mobility of factors of production	Workers and capital move easily between products	Resources are specialised or tied to one use
Unused capacity	Firms have spare machines, space and labour	Firms are already at full capacity
Ability to store	Stocks of the good can be kept and released	The good is perishable or expensive to store
Rate at which costs increase	Unit costs rise slowly as output grows	Unit costs rise steeply as output grows

Time

Time is usually the most important determinant. Think of three periods: immediately, the short run, and the long run. A farmer who has already planted cannot respond to a higher price this season, but can plant more next year. Here is an illustrative case for a fictional market when price rises by 10%:

Period	Rise in quantity supplied	PES
One week	1%	0.1
One year	6%	0.6
Five years	15%	1.5

The same product moves from inelastic to elastic as time passes.

Mobility of factors, unused capacity, storage and costs

Mobility matters because supply can only expand if resources can be drawn in from elsewhere. A printing firm with general-purpose machines can switch jobs quickly. A firm that depends on a rare specialist skill cannot.

Unused capacity means output can rise without new investment. A firm at full capacity must build or buy more first, which takes time and money.

Storage lets a firm hold stocks when prices are low and sell them when prices rise. Fresh produce cannot be stored for long, so supply cannot rise quickly from stock.

Rate of cost increase links directly to why firms supply more at higher prices. If producing extra units pushes up costs sharply, a higher price is needed to make each extra unit worth supplying, so the response is small and PES is low.

Primary commodities and manufactured products (HL only)

Primary commodities are goods such as crops, minerals and other raw materials. At HL you must be able to explain why their PES is generally lower than the PES of manufactured products. Link each reason to a determinant:

• Time. Many crops need a full growing season, and tree crops take years to mature. A mine needs exploration and development before output can rise.
• Mobility of factors. Land, mines and wells are fixed in location and difficult to switch to other uses.
• Unused capacity. Farms and mines often work close to their physical limits, and extra land cannot simply be created. A factory can add a shift or run machines longer.
• Ability to store. Many farm products are perishable. Manufactured goods are generally easier to hold as stock.
• Rate of cost increase. Pushing a fixed plot of land or a mine harder can make costs rise quickly.

Weather, disease and geology also limit how fast output can respond. Manufacturers can usually rearrange labour and machines, which gives them a higher PES.

A fictional example: the country of Kesmar relies on a tree crop that takes six years to bear fruit. A sudden price rise cannot raise supply for years. A factory elsewhere that assembles bicycles can add a shift within days.

Common errors

• Writing the formula upside down. Quantity supplied goes on top.
• Using absolute changes rather than percentage changes.
• Giving a negative PES because a fall in price was entered with the wrong sign.
• Saying a steeper line always means lower PES. Only the intercept, or the numerical calculation, tells you.
• Naming a determinant without saying which direction it moves PES.
• Using “long run” and “short run” as labels without saying what is fixed in each.
• Forgetting the HL point is HL only, or pushing it into SL answers where it is not required.

Next steps

Next, work through the practice questions, then use the revision notes as a quick recap.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published by the International Baccalaureate Organization (February 2020). This page covers sub-topic 2.6 in Unit 2.