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2281 · 2.8

Price elasticity of supply — practice questions

Practice and worked examples for 2281 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

Step 1: Calculate % change in price (%ΔP) %ΔP = ((240−240 - 200) / 200)×100=∗∗20%∗∗200) \times 100 = **20\%**

Step 2: Calculate % change in quantity supplied (%ΔQs) %ΔQs = ((550 - 500) / 500) × 100 = 10%

Step 3: Calculate PES PES = %ΔQs / %ΔP = 10% / 20% = 0.5

Note: The original solution used the midpoint method, which is also valid. This solution uses the standard percentage change formula for simplicity.

The supply is inelastic as the PES value of 0.5 is less than 1.

(b) Tax incidence Supply is inelastic (PES = 0.5) 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 clothing factory produces t-shirts. When the market price is £5 per shirt, it supplies 10,000 shirts per week. Following a rise in demand, the price increases to £6 per shirt, and the factory increases its output to 15,000 shirts per week.

(a) Calculate the price elasticity of supply for these t-shirts. (b) State whether the supply is elastic or inelastic and explain what this value means. (c) Suggest one determinant that could explain this level of elasticity.

Show solution outline

(a) Calculate PES

Step 1: Calculate the percentage change in quantity supplied (%ΔQs) Change in Qs = 15,000 - 10,000 = 5,000 shirts %ΔQs = (Change in Qs / Original Qs) × 100 %ΔQs = (5,000 / 10,000) × 100 = 50%

Step 2: Calculate the percentage change in price (%ΔP) Change in P = £6 - £5 = £1 %ΔP = (Change in P / Original P) × 100 %ΔP = (£1 / £5) × 100 = 20%

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 is greater than 1, the supply is price elastic. This means that the quantity supplied is highly responsive to a change in price; a 1% change in price leads to a 2.5% change in quantity supplied.

(c) Suggest a determinant One likely determinant is the availability of spare capacity. The factory may have had idle machinery or under-utilised factory space, allowing it to quickly ramp up production when the price increased. Alternatively, the firm could have easy access to factors of production, such as a flexible labour force or readily available raw materials (fabric, thread).

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