ELA - Price Elasticity of Supply Lesson

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Price Elasticity of Supply Lesson

The concept of price elasticity of supply (Es) tells us the degree to which quantity supplied changes in response to a change in the price of the good.

Price Elasticity of Demand

Price Elasticity Of Demand Price elasticity of demand can be categorized in five ways: 1. A good is considered price elastic if the percentage change in price produces a relatively larger percentage change in quantity demanded. IN this instance, the price elasticity of demand (Ed) is greater than 1. 2. A good is considered unit (or unitary) elastic if the percentage change in price produces a proportional percentage change in quantity demanded. In this instance, Ed equals 1. 3. A good is considered price inelastic if the percentage change in price produces a relatively smaller percentage change in quantity demanded. In this instance, Ed equals is less than 1. 4. A good is considered perfectly elastic if the percentage change in price produces a relatively immediate and infinite response in quantity demanded. In this instance, the Ed is infinity. A perfectly elastic demand curve would be graphed as a horizontal line. 5. A good is considered perfectly inelastic if the percentage change in price produces no change in the quantity demanded. In this instance, Ed equals 0. A graph of a perfectly inelastic demand curve would be graphed as a vertical line.

Generalization About Supply Curves

If the two extremes (perfectly elastic and perfectly inelastic) result in horizontal and vertical curves, then we can draw the following conclusion. A flatter supply curve implies a greater degree of elasticity and a steeper supply curve implies less elasticity.

Factors That Determine Price Elasticity of Supply

Excess Capability to Produce: Supply is more elastic when firms have extra available resources (capital, labor) to use to increase production in response to a price increase.

Nature of Production: Supply is more elastic on goods and services that are relatively easy to increase the production of in a short time period. For example, it would be easier to increase the production of packs of bubble gum than it would be to increase the production of diamonds.

Resource Mobility: Supply is more elastic when resources are able to freely move from one area to another.

Time Period: Supply tends to be more elastic in the long run as firms are able to seek out alternative forms of production.

Formula

The formula for calculating the price elasticity of supply is the same basic formula we used for the price elasticity of demand. 

ES equals {(percent delta QS) divided by (percent delta P)} is equal to {[Q2 minus Q1 divided by (Q2 plus Q1) divided by 2] divided by [P2 minus P1 divided by (P2 plus P1) divided by 2.]}

The most notable difference in the formulas is the fact that the quantities used for this formula are the quantities supplied. Also, there is no need to take the absolute value for Es because the value will always be a positive number (remember, the Law of Supply notes a positive relationship between price and quantity supplied). 

The Scale for Price Elasticity of Supply

Es > 1 = Elastic

Es = 1 = Unit (Unitary) Elastic

Es < 1 = Inelastic

Es = ∞ = Perfectly Elastic (this occurs when the %Δ in price is 0)

Es = 0 = Perfectly Inelastic (this occurs when the %Δ in quantity is 0) 

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