Definition – What is price elasticity of supply?
Price elasticity of supply (PES) measures how responsive supply of an item in relation to changes in its price.
A product with a PES of more than 1 is said to be elastic. When price changes a little, the supply of the product will change by a larger percentage.
A product with a PES of 1 is said to be unit elastic. Supply changes at the same percentage that price changes.
A product with a PES of 0 to 1 is said to be inelastic. Supply changes at a smaller percentage than the price.
A product with a PES of 0 is said to have fixed supply. Even with large price changes, there will be no increase or decrease in the supply of the good.
Formula – How to calculate the Price Elasticity of Supply
Price Elasticity of Supply = % Change in Quantity Supplied / % Change in Price
% Change in Quantity Supplied = (Quantity End – Quantity Start) / Quantity Start
% Change in Price = (Price End – Price Start) / Price Start)
Quantity supplied starts at 2,000 and increases to 30,000. In the same period price increases from $20 to $30.
% Change in Quantity Supplied = (30,000 – 2,000) / 2,000 = 28,000 / 2,000 = 14
% Change in Price = ($30 – $20) / $20 = $10 / $20 = 0.50
Price Elasticity of Supply = 14 / 0.50 = 28
Therefore, price elasticity of supply is 28.
Sources and more resources
- Wikipedia – Price elasticity of supply – A summary of information regarding the price elasticity of supply.
- Khan Academy – Elasticity of Supply and Price elasticity of demand and price elasticity of supply – Part of a larger course on mircoeconomics. This video and page introduce the concepts of supply elasticity.
- Lumen Learning – Price Elasticity of Supply – A page introducing the concept. Includes graphs and formulas.