Cambridge International as and a level Economics Ebook

52
Cambridge International AS Level Economics

---

research reports or surveys (using questionnaires and/or 
interviews), is costly in terms of time and money and may 
not be particularly valid or reliable.
Similar problems occur when trying to estimate income 
elasticity. Th
e data available are likely to be unreliable the 
longer the time span involved. Over time the products 
available in the market are subject to tremendous change 
particularly in technological terms. Th
is makes estimation 
hazardous. Th
erefore, many companies may prefer to 
make rough ‘guesstimates’ of elasticity values or to work 
with incomplete data, particularly if they are operating in 
markets where rapid change means past data cease to be a 
good indicator of the future.
Price elasticity of supply
Price elasticity of supply (PES)
is a numerical measure of 
the responsiveness of the quantity supplied to a change in 
the price of the product, 
ceteris paribus
. Th
e supply could 
be that of an individual business or it might refer to the 
market supply of an industry. It is expressed as:
PES
% change in quantity supplied
% change in price
=
Since the relationship between the price and quantity 
supplied is normally a direct one, the PES will tend to 
take on a positive value. If the numerical value of PES is 
greater than 1, then we say that supply is relatively price 
elastic, i.e., supply is responsive to a change in price. If 
the numerical value of PES is less than 1, then supply is 
relatively price inelastic, i.e., supply is unresponsive to a 
change in price.
Figure 2.10
 shows fi ve supply curves each with diff erent 
PES values.