OxfordAQA International AS and A-level Economics: Supply and PES (9640) – Revision Notes

Quick recall for the OxfordAQA International AS and A-level Economics (9640) specification, sections 3.1.2.3 (the supply of goods and services) and 3.1.2.4 (price elasticity of supply). Section 3.1 is International AS content. For full explanations, read the study guide, then try the practice questions. Course pages: hub and checklist. Check your gaps with the free diagnostics. Related recall: markets revision notes. All numbers below are invented and illustrative.

Definitions

Term	Meaning
Supply	Quantity producers are willing and able to offer at each price in a given period
Supply curve	Shows the relationship between price and quantity supplied; slopes upward
Extension / contraction	Movement along one curve, triggered by a change in the price of the good itself
Increase / decrease in supply	Shift of the whole curve caused by a change in another determinant
Price elasticity of supply (PES)	Responsiveness of quantity supplied to a change in price

Why the curve slopes upward

1. Higher price means higher profit per unit.
2. Profit gives firms an incentive to expand output, and attracts new firms.
3. Extra output costs more per unit when capacity is stretched, so a higher price is needed to justify it.

Market supply is the horizontal sum of firms’ supplies.

Movement or shift?

Cause	Result
Own price changes	Movement along the curve
Costs of production fall	Shift right
Costs of production rise	Shift left
Better technology or productivity	Shift right
Tax per unit introduced	Shift left (upward)
Subsidy per unit introduced	Shift right (downward)
More firms in the market	Shift right
Better prices in an alternative product	Shift left for this good
Bad weather or natural event	Shift left (right if good conditions)
Producers expect higher future prices	May shift left now

Remember: a change in demand does not shift supply. It moves along the supply curve.

Method: calculating PES

1. Find the percentage change in price: (new − old) ÷ old × 100.
2. Find the percentage change in quantity supplied in the same way.
3. Divide the quantity percentage by the price percentage.
4. State whether supply is elastic (above 1), inelastic (below 1) or unit elastic (1), and say what the number means.

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

Worked reminders

• Price 4.00 to 5.00 (+25%), quantity 80 to 100 (+25%): PES = 25 ÷ 25 = 1.0 (unit elastic).
• Price +8%, quantity +2.4%: PES = 2.4 ÷ 8 = 0.3 (inelastic).
• PES 0.6 and price +12% means quantity rises by 0.6 × 12 = 7.2%. From 5,000 that gives 5,360.
• A firm at 70% capacity can raise output by 100 ÷ 70 − 1 = 43%. One at 98% can raise it by about 2%.

Reading PES values

PES	Name	Curve
0	Perfectly inelastic	Vertical
0 to 1	Inelastic	Steep, usually meets the quantity axis
1	Unit elastic	Straight line through the origin
Above 1	Elastic	Usually meets the price axis
Infinite	Perfectly elastic	Horizontal

A straight line through the origin has PES = 1 at every point. A straight line with a positive price intercept has PES above 1, and the value falls towards 1 as you move up the line.

Determinants of PES

Factor	Supply more responsive if…	Supply less responsive if…
Spare capacity	Plenty unused	Running near full capacity
Stocks	Goods can be stored and stocks are held	Perishable, or no stocks
Time	Long run	Short run
Factor mobility	Workers and machines switch easily	Specialised or immobile
Production period	Short	Long (for example crops)
Availability of inputs	Plentiful	Scarce or skilled
Barriers to entry	Low, so new firms enter	High

Must-know distinctions

• Extension of supply versus increase in supply. Own price (movement) versus another determinant (shift).
• Steepness versus elasticity. Two straight lines with the same slope can have different elasticities, because elasticity uses percentage changes.
• Short run versus long run. The same product often has a lower PES in the short run than in the long run.
• Tax versus subsidy. A tax shifts supply left (up); a subsidy shifts it right (down).

Diagrams in words

Axes: price (P) on the vertical axis, quantity supplied (Q) on the horizontal axis.

Price
  |      S1        S2
  |      /         /
  |     /         /
  |    /         /
  |   /         /
  +------------------- Quantity
        S2 is to the right of S1

• Label the original curve S1 and the new curve S2, and draw both sloping upward.
• A fall in costs, new technology or a subsidy: S2 lies to the right of S1.
• A rise in costs or a tax: S2 lies to the left of S1.
• Mark the same price on the vertical axis and show the two quantities on the horizontal axis. The gap between them is the change in supply at that price.
• For a movement, stay on one curve and mark two points on it, with an arrow along the curve.

More worked reminders

Tax and subsidy shifts

Supply is Qs = 200P − 100. A tax of 0.30 per unit gives Qs = 200P − 160. At P = 2, quantity falls from 300 to 240, a loss of 60 units (200 × 0.30). A cost fall that adds 60 units at every price gives Qs = 200P − 40, so at P = 2 quantity rises from 300 to 360, which is 20% more.

Summing firms

Firm X supplies Qs = 80P − 40 and firm Y supplies Qs = 70P − 30. At P = 2 they supply 120 and 110. Market supply for the two firms is 230. Always add quantities at the same price, not prices at the same quantity.

One product, three time periods

A price rise of 10% gives a quantity response of 0% immediately, 4% in the short run and 15% in the long run. PES is 0, then 0.4, then 1.5. Supply moves from perfectly inelastic through inelastic to elastic as firms have time to adjust.

Chains of reasoning

Use these in extended answers. Each link should be a reason, not just a statement.

Why supply of a crop is inelastic in the short run. The price rises, so growers want more output. But the crop takes a season to grow, and land and labour are already committed. So output cannot rise quickly. Stocks of the harvested crop may be low, and it may be perishable. Therefore quantity supplied rises by a smaller percentage than price, and PES is below 1.

Why a factory can respond quickly. The price rises, so profit per unit rises. The factory has spare machines and finished goods in a warehouse. It adds shifts and releases stock within days. Quantity supplied rises by a larger percentage than price, and PES is above 1.

Evaluation points.

• The time period matters most for most products, so always say whether you mean the short run or the long run.
• Spare capacity helps only if inputs such as labour and materials are also available.
• Entry by new firms raises PES in the long run, but barriers to entry weaken this.
• A single PES value covers one price change over one period. A different price change or period may give a different figure.

Quick self-test

1. A price rises from 20 to 24 and quantity supplied rises from 500 to 540. Calculate PES.
2. Is the supply in question 1 elastic or inelastic?
3. A supply curve is a straight line through the origin. What is PES at every point?
4. The price of a good rises. Is that a shift or a movement?
5. Name two factors that make supply of fresh fruit inelastic in the short run.
6. A per-unit subsidy is introduced. Which way does the supply curve shift?
7. PES is 2.5 and price rises by 4%. By how much does quantity supplied rise?
8. A factory has 80% capacity utilisation. By what percentage can it raise output without new plant?
9. Price rises 6% and quantity supplied does not change. State the PES.
10. Supply is Qs = 50P − 20. Find quantity supplied at P = 4 and at P = 6, and the PES between them.

Answers

1. Price +20%, quantity +8%, PES = 8 ÷ 20 = 0.4.
2. Inelastic, because PES is below 1.
3. 1 (unit elastic).
4. A movement along the curve (an extension of supply).
5. Any two of: long production period, perishability, no stocks, limited spare capacity.
6. Right (downward).
7. 2.5 × 4 = 10%.
8. 100 ÷ 80 − 1 = 25%.
9. 0 (perfectly inelastic).
10. At 4: 180. At 6: 280. Price +50%, quantity +55.6%, PES = 55.6 ÷ 50 = 1.11.

Where marks are usually lost

• Using the wrong base for a percentage change (new value rather than old).
• Giving the number but not saying whether supply is elastic or inelastic.
• Describing a change in own price as a shift of the curve.
• Shifting the curve the wrong way for a tax or a subsidy.
• Listing determinants of PES without linking each to the specific market in the question.
• Forgetting the time period when describing PES.
• Treating a steep curve as automatically inelastic.
• Not stating a final judgement on which factor matters most.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, sections 3.1.2.3 and 3.1.2.4, with quantitative skills in section 3.5.