What is Price Elasticity of Supply
Price elasticity of supply is a measure of how responsive the quantity supply of a good is to a change in price. The price elasticity of supply reflects how the quantity of supply is affected by the price change. Since it is calculated by dividing the change in quantity supply by the change in price, the higher elasticity increases, the quantity supply will respond more to the price changes.
The price elasticity of demand is often used as a measure for how much consumers will buy when the prices go up or down. High elasticities mean that consumers will buy less when prices are raised, and more when prices drop. Low elasticities mean that consumers won’t change their buying habits much at all with changes in prices.
However, the price elasticity of supply measures the percentage, not a unit in variables. This helps the economist comparisons among different goods easier.
Price Elasticity of Supply Formula
The price elasticity of supply can be calculated by dividing the change in quantity supply by the change in price. The formula for calculating the price elasticity of supply is:
Price elasticity of supply (Es) = %Change in quantity supply ÷ %Change in price
A positive number indicates that an increase in price will cause an increase in quantity supplied, and vice versa. A negative number indicates that an increase in price will cause a decrease in quantity supplied, and vice versa.
Price Elasticity of Supply Example
The price of a good falls by 5%, the quantity supplied falls by 2%.
The price elasticity of supply = 2 ÷ 5 = 0.4
Elastic and Inelastic of Supply
The price elasticity of supply can be classified be relative responsiveness by the terms elastic and inelastic.
The supply is inelastic when the percentage change in quantity supplied is less than the percentage change in price (E > 1). In contrast, the supply is elastic when the percentage change in quantity supply is more than the percentage change in price (E > 1).
- Elastic (E > 1): The quantity supply changes greater than the price change.
- Inelastic (E < 1): The quantity supply doesn’t change much with a price change.
Moreover, the elasticity of supply can be described along with a supply curve from least to most elastic:
- Perfect elastic: Quantity responds enormously to changes in price (E = ∞)
- Elastic: The percentage change in quantity exceeds the percentage change in price (E > 1).
- Unit elastic: The percentage change in quantity is the same as the percentage change in price (E = 1).
- Inelastic: The percentage change in quantity is less than the percentage change in price (E < 1).
- Perfectly inelastic: Quantity does not respond at all to changes in price (E = 0).
FAQs
The price elasticity of supply reflects how the (quantity of) supply is affected by the price change.
The price elasticity of demand is often used as a measure for how much consumers will buy when the prices go up or down.
References: Federal Reserve Bank of St. Louis
