AS Level Economics 9708: PES Calculation and Determinants for Scented Candles

An artisan workshop hand-pours scented candles using a specialty soy-wax blend imported from a single overseas supplier under an annual import quota, and each candle is finished by one of the workshop's small team of trained candle makers. The workshop raises the price of its scented candles from $8 to $10 each. As a result, the quantity of candles it supplies each week rises from 300 to 330.

(a) Calculate the percentage change in price and the percentage change in quantity supplied. [2]

(b) Calculate the price elasticity of supply (PES) for the candles, showing your working, and state whether supply is price elastic, price inelastic or unitary. [3]

(c) State and explain one determinant of price elasticity of supply that could explain why supply of the candles is price inelastic in this context. [2]

Part (a): Percentage changes in price and quantity supplied

Percentage change in price, using the original price of $8 as the base: $\%\Delta P = \frac{10-8}{8}\times100 = \frac{2}{8}\times100 = +25\%$

Percentage change in quantity supplied, using the original quantity of 300 as the base: $\%\Delta Q_s = \frac{330-300}{300}\times100 = \frac{30}{300}\times100 = +10\%$

Part (b): Calculating and classifying PES

$PES = \frac{\%\Delta Q_s}{\%\Delta P} = \frac{10}{25} = 0.4$

Since $0.4 < 1$ , supply of the scented candles is price inelastic: the percentage rise in quantity supplied (10%) is proportionately smaller than the percentage rise in price (25%).

Part (c): A determinant of PES

One key determinant of price elasticity of supply is the availability of spare capacity and raw materials. This workshop depends on a specialty soy-wax blend that comes from a single overseas supplier operating under a fixed annual import quota, so it cannot simply buy more wax if it wants to raise output, no matter how much the price of candles rises. It also relies on a small team of trained candle makers, so it cannot quickly add skilled labour either. With little spare capacity in either its key raw material or its workforce, the workshop can only raise quantity supplied by a small amount even when price rises a lot, which is consistent with the inelastic value of $0.4$ found in part (b).

Final answers

(a) $\%\Delta P = +25\%$ , $\%\Delta Q_s = +10\%$
(b) $PES = 0.4$ . Supply is price inelastic
(c) Limited spare capacity (a quota-restricted wax supplier and a small skilled workforce) makes supply price inelastic