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9708 · 2.3

Price elasticity of supply — practice questions

Practice and worked examples for 9708 Price elasticity of supply. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

When the price of wheat rises from 200to200 to 240 per tonne, quantity supplied increases from 500 to 550 thousand tonnes.

(a) Calculate PES. (b) If an indirect tax raises the price consumers pay by $20, and supply is inelastic while demand is elastic, who bears most of the tax?

Show solution outline

(a) Calculate PES ΔP = (240−240 − 200)/$220 × 100 = 18.2% (midpoint method) ΔQ = (550 − 500)/525 × 100 = 9.5%

PES = 9.5% ÷ 18.2% = 0.52 (inelastic — quantity responds less than price)

(b) Tax incidence Supply is inelastic (PES = 0.52) and demand is elastic → producers bear most of the tax.

Reason: producers cannot easily reduce output, so they absorb much of the tax in lower post-tax revenue; consumers with elastic demand would buy much less if the full tax were passed on.

Worked example 2

A manufacturer of surgical face masks increases the price per box from 1.50to1.50 to 1.80. In response, they increase their weekly output from 10,000 boxes to 15,000 boxes.

(a) Calculate the price elasticity of supply for the face masks. (b) State whether the supply is price elastic or inelastic and explain what this means for the manufacturer.

Show solution outline

(a) Calculate PES

Step 1: Calculate the percentage change in price (%ΔP) %ΔP = [(New Price - Old Price) / Old Price] * 100 %ΔP = [(1.80−1.80 - 1.50) / 1.50]∗1001.50] * 100 %ΔP = [0.30/0.30 / 1.50] * 100 = 20%

Step 2: Calculate the percentage change in quantity supplied (%ΔQs) %ΔQs = [(New Qs - Old Qs) / Old Qs] * 100 %ΔQs = [(15,000 - 10,000) / 10,000] * 100 %ΔQs = [5,000 / 10,000] * 100 = 50%

Step 3: Calculate PES PES = %ΔQs / %ΔP PES = 50% / 20% = 2.5

(b) Interpret the result The PES value is 2.5. Since 2.5 > 1, the supply is price elastic.

This means that the percentage change in quantity supplied (50%) is greater than the percentage change in price (20%). The manufacturer is highly responsive to the price change, likely because they have spare production capacity or can easily acquire more resources to increase output.

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