1.2.4 and 1.2.5 Supply and price elasticity of supply – Edexcel Econ A notes

Contents

Supply and the factors that influence supply

Supply = the amount of good or service producers are willing to supply at a given price (in a given time period).

So, which factors determine supply?

Well, the first factor, just like with demand, is the price.

• If there’s a higher price, there’s a higher profit per unit you’re supplying, there’s a greater incentive to supply.
• So supply rises, and this is shown on the diagram below.
• The supply curve is upward sloping in the diagram below, showing as price increases, the supply increases.
• So as the price increases from P1 to P2, there’s a greater incentive to supply. So the quantity supplied increases from Q1 to Q2.
• This is a movement along the supply curve.
• As supply is increasing with a movement along the supply curve, we say there has been an extension along the supply curve.

Other factors apart from price will influence the supply. These non-price factors will shift the supply curve to the right for example from S to S1 in the next diagram below.

What else influences supply?

• A change in costs of production.
  • Suppose there’s a cost increase for wages for workers or the cost of machinery, capital, cost of land. That’s going to reduce the profit from supplying extra units. That would reduce supply.
  • For those further ahead in the course, think about what could influence the equilibrium price of these factors of production. For example, higher labour supply could reduce equilibrium wages. This could reduce production costs, shifting supply of the final good produced to the right.
• Subsidies decrease cost of business. Subsidy is a payment by the government to firms. So that would increase supply.
• Taxes are seen as increasing business costs and so they will lower supply.
• Other policies that could influence costs, such as regulations. If the firm has to comply with regulation, then the firm may have to hire more lawyers, increasing business costs and reducing supply.
• A poor weather situation, maybe a drought or a lack of rain. This could reduce the food supply, for example.
• Finally, if there’s improvement in productivity or technology, that might lower the cost per unit for the firm. This could make the firm more efficient, and that would raise the supply. So that would be shown by a shift right in the supply curve from S to S1.

Evaluation points for the factors influencing supply

Why might some of these factors only have a limited effect on the supply? Here are some examples.

• Subsidies: Firms can become dependent on subsidy funds. This could reduce the extent to which firms invest in improving their productivity. So, while a subsidy may shift supply to the right today, it may slow the growth rate of supply over time.
• For changes in input prices, consider the cause of the change:
  • Rises in the minimum wage may increase business costs and reduce supply of the good being produced. However, the higher wage may increase worker motivation, increasing productivity and increasing supply.
  • Cheaper and more productive artificial intelligence versus possible mistakes that AI can make, which could reduce the extent of productivity growth from AI.
• The effects of price changes on supply depend on the price elasticity of supply (see the section below on the PES for more).

Price elasticity of supply (PES)

The price elasticity of supply (PES) is measuring the responsiveness of supply to changes in price.

The formula for the PES is the percentage change in the quantity supplied, divided by the percentage change in price:

The PES is elastic if it’s above one. That would mean a given percentage increase in price leads to an even larger percentage increase in supply. Supply is very responsive to price changes.

The PES would be inelastic if its value lies between zero and one. In other words, if the price rises by a given percentage, the supply may not increase as much in percentage terms.

That’s reflected in these lines on the diagram below.

Note extreme values of the PES include:

• Perfectly inelastic. PES = 0 and the supply curve is drawn as a vertical line.
  • No matter the price, the supply remains the same.
• Perfectly elastic. PES is infinite and the supply curve is drawn as a horizontal line.
  • If the price falls slightly, supply goes to zero.
  • If the price rises slightly, supply is unlimited.

What determines the PES? One way to remember this is to use the MUST acronym:

• Mobility and (availability) of factors of production So if there’s more workers available or they’re more mobile, they can move around where they’re needed. The PES becomes more elastic.
  • This also applies to things like the availability of capital and land.
• Unused capacity: More generally, if there’s unused capacity in some way, then that capacity can be easily utilized to increase supply if needed. So there be more elastic PES.
• Stocks: Also, if you happen to have some stocks sitting back in reserve, then you can very easily release those stocks to increase supply.
• Time frame: In the short run in the economics we tend to say that the PES is inelastic.
  • In economics, the short run means there is at least one factor production is going to be fixed.
  • For example, it may be very hard to build a new factory suddenly and that means the number of factories you’ve got is fixed. You could still change your quantity of labour hired for example.
  • However, in the long run over time you have more flexibility in your production process. So you could decide to build lots more factories all of a sudden.
  • This makes the PES more elastic in the long run.

Practice questions on supply and the price elasticity of supply

The price of orange juice in US dollars per pound (USD per lb) fell by 41% from December 2024 to March 2025. Some consumers are becoming more aware of the nutritional value of orange juice, such as from antioxidants. Harvests in Florida and Brazil recovered after poor harvests in the two years prior. There has also been a large flow of oranges onto the market from Spain. Lower quality of orange juice may have also put off consumers.

Using the information provided, assess two determinants of the supply of orange juice. (12 marks)

Related resources for Edexcel Economics A