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

This guide is written for the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2. It covers 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, and the A-level builds on it. The quantitative skills in section 3.5 can be assessed in any unit, so the calculations here also practise QS2 (percentages), QS4 (graphs) and QS8 (elasticity). All figures are invented and illustrative.

Demand and its elasticities, and the way supply meets demand to set a price, are covered elsewhere. Here you learn supply on its own. Use the revision notes for recall and the practice questions to test yourself. Course pages: OxfordAQA A-level Economics hub and checklist. Not sure where to start? Take a free 10-minute diagnostic. For wider markets revision, see the operation of markets.

What you must be able to do

Section	Specification content	What it means in practice
3.1.2.3	Factors which determine the supply of a good or service	List and explain the determinants of supply
3.1.2.3	A supply curve shows the relationship between price and quantity supplied	Draw, read and describe a supply curve
3.1.2.3	Higher prices imply higher profits, giving an incentive to expand production	Explain why the curve slopes upward
3.1.2.3	Causes of shifts in the supply curve	Tell a move along one curve apart from a shift of the whole curve
3.1.2.4	Meaning of price elasticity of supply	Define it and calculate it
3.1.2.4	Factors that influence price elasticity of supply	Explain why supply is responsive or unresponsive

The specification also says you should be able to calculate and interpret numerical values of price elasticity of supply.

1. Supply and the supply curve

Supply is the quantity of a good or service that producers are willing and able to offer for sale at each price in a given period. A supply curve shows the relationship between price and quantity supplied. A supply schedule is the same information as a table.

Here is a schedule for a small bakery market in an imaginary town (illustrative figures). Quantity supplied is loaves per day.

Price per loaf	1.00	1.50	2.00	2.50	3.00
Quantity supplied	100	200	300	400	500

Plot price on the vertical axis and quantity supplied on the horizontal axis. The five points lie on a straight line sloping up from left to right. The equation of this line is Qs = 200P − 100, where Qs is quantity supplied and P is price.

Why the curve slopes upward

The specification asks you to understand that a higher price implies higher profit, and that this gives firms an incentive to expand production. Build the chain like this:

1. The price rises while costs per unit stay the same.
2. Profit on each unit sold rises.
3. Existing firms have a reason to produce more, and new firms have a reason to enter.
4. Extra output is usually more costly per unit once existing capacity is stretched (overtime pay, more expensive inputs), so a higher price is needed to make it worthwhile.

Quantity supplied therefore rises as price rises.

Market supply

Market supply is the sum of the quantities every firm supplies at each price. You add horizontally. Suppose three bakeries have supply curves Qs = 80P − 40, Qs = 70P − 30 and Qs = 50P − 30. At a price of 2.00 they supply 120, 110 and 70 loaves, so the market supplies 300. At 3.00 they supply 200, 180 and 120, a total of 500. Both totals match the schedule above, so the market curve is Qs = 200P − 100.

2. Movements along and shifts of the supply curve

When the price of the good itself changes, you move along the same curve. This is an extension or a contraction of supply. Any other determinant changing causes a shift of the whole curve. A shift to the right is an increase in supply (more supplied at every price). A shift to the left is a decrease in supply.

Determinant	Change	Effect on supply curve
Costs of production (wages, raw materials, energy, rent)	Fall	Shifts right
Costs of production	Rise	Shifts left
Technology and productivity	Improvement	Shifts right
Indirect taxes (a tax per unit sold)	Introduced or raised	Shifts left (upward)
Subsidies (a payment per unit produced)	Introduced or raised	Shifts right (downward)
Number of firms in the market	Rises	Shifts right
Prices of other goods firms could produce instead	Rise	Shifts left for this good
Weather and natural events (important in farming)	Bad harvest	Shifts left
Producers’ expectations of future prices	Expect higher prices later	May shift left now, as stocks are held back

Worked example: a per-unit tax

The government of an imaginary country puts a tax of 0.30 on every loaf in the market above. At any quantity, firms now need 0.30 more per loaf to be willing to supply it. The new curve is Qs = 200(P − 0.30) − 100 = 200P − 160.

At a price of 2.00, firms now supply 200 × 2.00 − 160 = 240 loaves, where before they supplied 300. The curve has moved up by 0.30 at every quantity, and equivalently left by 60 loaves at every price (200 × 0.30 = 60). This is a decrease in supply.

Worked example: a cost fall

New ovens cut costs, and the curve becomes Qs = 200P − 40. At 2.00, firms supply 360 loaves instead of 300, a rise of 60 loaves, which is 20%. The curve shifts right. The price did not change, so this is not a movement along the old curve.

3. Price elasticity of supply

Price elasticity of supply (PES) measures how strongly quantity supplied reacts when price changes.

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

Percentage change = (new − old) ÷ old × 100. Because the supply curve slopes upward, PES is normally positive, and you can ignore signs.

Worked example 1

In the bakery market the price rises from 2.00 to 2.50 and quantity supplied rises from 300 to 400.

• % change in price = (2.50 − 2.00) ÷ 2.00 × 100 = 25%
• % change in quantity = (400 − 300) ÷ 300 × 100 = 33.3%
• PES = 33.3 ÷ 25 = 1.33

Supply is elastic: quantity supplied rises by a larger percentage than price. The value says that for every 1% rise in price, quantity supplied rises by about 1.33%.

Worked example 2: two time periods

In Country B, the price of tomatoes rises by 8%. Within a few weeks quantity supplied rises by 2.4%. After two growing seasons it has risen by 12%.

• Short run: PES = 2.4 ÷ 8 = 0.3 (inelastic)
• Long run: PES = 12 ÷ 8 = 1.5 (elastic)

Worked example 3: finding the quantity

PES for a product is 0.6. Its price rises from 50 to 56, and quantity supplied was 5,000.

• % change in price = 6 ÷ 50 × 100 = 12%
• % change in quantity = 0.6 × 12 = 7.2%
• New quantity = 5,000 × 1.072 = 5,360

Interpreting the value

PES	Description	Meaning
0	Perfectly inelastic	Quantity supplied does not change with price (a vertical curve)
Between 0 and 1	Inelastic	Quantity changes by a smaller percentage than price
1	Unit elastic	Quantity and price change by the same percentage
Above 1	Elastic	Quantity changes by a larger percentage than price
Infinite	Perfectly elastic	Firms supply any amount at one price (a horizontal curve)

Straight-line supply curves

You can tell the elasticity of a straight supply curve from where it meets an axis, without calculating:

• A line that starts at the origin has PES = 1 at every point.
• A line that meets the price axis (it has a positive price intercept) has PES above 1 at every point, falling towards 1 as you move up it.
• A line that meets the quantity axis has PES below 1 at every point, rising towards 1 as you move up it.

Check the first case with a point: if Qs = 200P, at P = 2 the quantity is 400 and PES = (200 × 2) ÷ 400 = 1. The bakery curve meets the price axis at 0.50, and its PES is 2.00 at a price of 1.00, 1.33 at 2.00 and 1.20 at 3.00. So a straight line does not have constant elasticity unless it starts at the origin. Do not confuse slope with elasticity.

4. Determinants of price elasticity of supply

Supply is more elastic when firms can raise output quickly and cheaply. The main factors are:

• Spare capacity. A firm using 70% of its capacity can expand output by about 43% (100 ÷ 70 = 1.43) without new plant. A firm at 98% can expand only about 2%.
• Stocks of finished goods. Firms holding stocks can release them quickly. A perishable good such as fresh fruit cannot be held back, so its supply is less elastic.
• Time period. Given longer, firms can build new capacity and train workers, and new firms can enter, so the long-run PES is higher.
• Ease of switching factors of production. If workers and machines move easily between products, firms can switch to the product whose price has risen.
• Production period. Crops that take a year to grow have a low PES in the short run. Services such as haircuts can be expanded quickly.
• Availability of inputs. Scarce raw materials or skilled labour limit how fast output can rise.
• Barriers to entry. Low barriers let new firms enter when prices rise, which makes market supply more elastic.

Evaluation: how far does each factor matter?

A strong answer weighs the factors rather than listing them. For a farm crop, the production period is usually the dominant limit in the short run, so the time period matters most. In a manufacturing market with spare capacity and stored goods, those two factors dominate and supply may be elastic even over a few weeks. Say which factor matters most for the market in the question, and why, in a final judgement. Also note that PES is a measure for one price change over one period, so quote the period.

5. Common errors

• Writing “supply increases” when the price of the good changed. That is an extension of supply, a movement along the curve.
• Shifting the supply curve when demand changes. A change in demand moves along the supply curve.
• Dividing absolute changes instead of percentage changes.
• Calculating the percentage change from the new value rather than the old value.
• Saying a steep curve always has low elasticity. Elasticity depends on percentage changes, so check the intercept.
• Giving a PES with no interpretation. Say what the number means for the market.

Next steps

Work through the practice questions, then use the revision notes. For earlier topics, see markets revision notes and markets practice.

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. For International AS exams May/June 2021 onwards and International A-level exams May/June 2022 onwards.