IB DP Economics - Unit 2 - Determinants of PES-Study Notes - New Syllabus

Determinants of Price Elasticity of Supply (PES)

The price elasticity of supply (PES) depends on several factors that determine how easily and quickly producers can respond to changes in price.

1. Time

Time is one of the most important determinants of PES.

• Short run → supply is more inelastic
• Long run → supply is more elastic

Explanation:

• In the short run, firms cannot easily change production due to fixed factors.
• In the long run, firms can expand capacity, invest in new capital, and hire more labour.
• This increases their ability to respond to price changes.

More time → Greater flexibility → More elastic supply

2. Mobility of Factors of Production

The ease with which factors of production (land, labour, capital) can be reallocated affects PES.

• High mobility → supply is more elastic
• Low mobility → supply is more inelastic

Explanation:

• If resources can be easily moved between uses, firms can increase production quickly.
• If resources are specialized or difficult to transfer, supply cannot respond easily.

More mobile resources → Higher responsiveness

3. Unused Capacity

The amount of spare capacity a firm has influences its ability to increase output.

• High unused capacity → supply is more elastic
• Full capacity → supply is more inelastic

Explanation:

• Firms with spare capacity can increase production without significant cost increases.
• Firms operating at full capacity must invest in new resources, making supply less responsive.

Spare capacity → Easy output increase

4. Ability to Store

The ability to store goods affects how supply responds to price changes.

• Storable goods → supply is more elastic
• Perishable goods → supply is more inelastic

Explanation:

• If goods can be stored, producers can withhold supply when prices are low and sell later.
• Perishable goods must be sold quickly, limiting flexibility.

Storage → Greater control over supply timing

5. Rate at Which Costs Increase

The speed at which production costs rise as output increases affects PES.

• Costs increase slowly → supply is more elastic
• Costs increase rapidly → supply is more inelastic

Explanation:

• If costs rise gradually, firms can increase output without major cost increases.
• If costs rise quickly, firms are discouraged from expanding production.
• This is often linked to diminishing returns.

Higher cost increase → Lower responsiveness

Summary Table

Key Ideas:

• PES depends on production flexibility.
• Time is the most important determinant.
• Firms respond more easily when constraints are low.
• These factors explain differences in supply across industries.