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Definition – What is price elasticity of supply?
Price elasticity of supply (PES) measures how much the quantity supplied of a good changes in response to a price change. It shows how easily producers can increase or decrease supply when prices fluctuate.
- If PES > 1, supply is elastic, meaning producers can quickly increase supply when prices rise.
- If PES < 1, supply is inelastic, meaning producers struggle to change supply quickly.
- If PES = 1, supply is unit elastic, meaning the percentage change in supply is proportional to the price change.
Elasticity helps businesses and policymakers anticipate supply responses to market shifts.
Formula – How to calculate the Price Elasticity of Supply
Price Elasticity of Supply = % Change in Quantity Supplied ÷ % Change in Price
Where:
- % Change in Quantity Supplied is the percentage change in the number of units producers are willing to supply. % Change in Quantity Supplied = (Quantity End – Quantity Start) ÷ Quantity Start
- % Change in Price is the percentage change in the price of the good. % Change in Price = (Price End – Price Start) ÷ Price Start)
Example
Suppose the price of a product increases by 15%, and the quantity supplied increases by 30%. The price elasticity of supply would be:
PES = 30% ÷ 15% = 2
This indicates that supply is elastic, as producers were able to respond significantly to the price increase.
What is Price Elasticity of Supply Used For?
Price elasticity of supply helps businesses and policymakers understand how flexible supply is in response to price changes. It’s useful for planning production, especially in industries with fluctuating prices. If PES is high, producers can quickly increase supply in response to price rises, maximizing profit opportunities. Conversely, inelastic supply limits the ability to increase production quickly.
For example, industries like agriculture may have inelastic supply in the short run due to growing cycles, while manufactured goods may have more elastic supply because production can be ramped up quickly.
Elastic vs. Inelastic Supply
- Elastic Supply: When PES is greater than 1, supply is elastic. A small price change results in a larger percentage change in quantity supplied. Goods with elastic supply can be produced and supplied quickly and easily when prices rise.
- Inelastic Supply: When PES is less than 1, supply is inelastic. This means that even when prices change, the quantity supplied doesn’t respond as much. Goods with inelastic supply, like oil or agricultural products, can take time to produce or adjust in quantity.
Price Elasticity of Supply vs. Price Elasticity of Demand
While price elasticity of supply (PES) measures the responsiveness of supply to price changes, price elasticity of demand (PED) measures how responsive consumers are to price changes. PES focuses on how producers react to prices, while PED looks at consumer reactions. Both are crucial for understanding how price changes affect markets from both the supply and demand sides.
Factors Affecting Price Elasticity of Supply
Several factors influence how elastic or inelastic supply is:
- Production Time: Goods that take longer to produce tend to have inelastic supply, while goods that can be made quickly have elastic supply.
- Availability of Resources: If resources are readily available, producers can quickly ramp up production, making supply more elastic.
- Capacity: Firms operating at full capacity may struggle to increase supply, making their supply inelastic in the short term.
Sources and more resources
- Wikipedia contributors. (2024a, February 15). Price elasticity of supply. Wikipedia. https://en.wikipedia.org/wiki/Price_elasticity_of_supply
- Khan Academy. (n.d.-i). https://www.khanacademy.org/economics-finance-domain/microeconomics/elasticity-tutorial/price-elasticity-of-supply/v/elasticity-of-supply
- Khan Academy. (n.d.-j). https://www.khanacademy.org/economics-finance-domain/microeconomics/elasticity-tutorial/price-elasticity-tutorial/a/price-elasticity-of-demand-and-price-elasticity-of-supply-cnx
- Kacapyr, E., & Redelsheimer, J., & Musgrave, F. Barron’s AP Microeconomics / Macroeconomics (6th ed.). (2018). United States of America: Barron’s. ISBN: 978-1-4380-1065-6. Page 70.
- Pindyck, R., & Rubinfeld, D., Microeconomics (8th ed.), (2013). United States of America: Pearson. ISBN 13: 978-0-13-285712-3. Page 38.
- Nicholson, W., & Snyder, C. Microeconomic Theory – Basic Principles and Extensions (10th ed.). (2008). United States of America: Thomas South-Western. ISBN 13: 978-0-324-42162-0. Page 398.
- Greenlaw, S., & Shapiro, D., Principles of Microeconomics 2e. (2018). Houston: Rice University OpenStax. ISBN 13: 978-1-947172-35-7. Page 108.