Elasticity of Supply

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Price Elasticity of Supply
 Law of supply tells us that producers will respond to a price drop by
producing less, but it does not tell us how much less. The degree of
sensitivity of producers to a change in price is measured by the concept
of price elasticity of supply.
 Price elasticity of supply is the percentage change in quantity supplied
resulting from a percent change in price.
 It is a measure of how much the quantity supplied of a good responds to
a change in the price of that good.
 The elasticity of supply is the same basic formula as the demand
elasticity, but looks at the percentage change in quantity supplied instead
of percentage change in quantity demanded.
PriceinChangePercentage
SupplyQuantityinChangePercentage
=SupplyofElasticityPrice
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 If percentage change is not available then:-
 Putting both the equation together then,
 Example
1. If the quantity supplied of Product B has decreased from 1000 units to
200 units as price decreases from $4 to $2 per unit, the coefficient for
Es is:
 Es = {(Q1-Q2) / [1/2 (Q1+Q2)] } / {(P1-P2) / [1/2 (P1 + P2)]} = {(1000 -
200) / 1/2(1000 + 200)} / {(4-2) / 1/2 (4+2)} = 2
21
21
2
1
QsinChangePercentage
QQ
QQ
Where Q1 = initial Qs, and Q2 = new Qs.
21
21
2
1
PriceinChangePercentage
PP
PP
Where P1 = initial Price, and P2 = New Price.
21
21
21
21
2
1
2
1
PP
PP
QQ
QQ
Es

Ranges of Elasticity
 Perfectly Elastic
ES =
 Relatively Elastic
ES > 1
 Unit Elastic
ES = 1
 Relatively Inelastic
ES < 1
 Perfectly Inelastic
ES = 0

A Variety of Supply Curves
Perfectly Inelastic Supply - Elasticity equals 0
Inelastic Supply- Elasticity is less than 1
Price
Quantity100
$10
$5
1. An increase in price...
2. ...leaves the quantity
supplied unchanged.
Price
Quantity100
$5
$4
1. A 22 % increase in price...
2. ...leads to 10% increase in
Quantity.
110
Supply
Supply

Unit Elastic Supply - Elasticity equals 1
Elastic Supply - - Elasticity is greater than 1
A Variety of Supply Curves
Price
Quantity
$5
$4
2. ...leads to a 25% increase in
Quantity.
100
Price
Quantity100
$5
$4
2. …leads to a 67% increase
in Quantity.
167
125

Quantity
Price
Supply$4
1. At any price
above $4, quantity
supplied is infinite.
2. At exactly $4,
producers will
supply any quantity.
3. At a price below $4,
Quantity supplied is zero.
Perfectly Elastic Supply - Elasticity equals infinity

Determinants of supply elasticity
 The following list contains the main determinants of supply elasticity.
1. Product Type
2. Time
3. Production Capacity
4. Input substitution -- Flexibility and Mobility
 Product Type - The type of product impacts how quickly a producer is
able to respond to a change in price. A manufacturing firm may be able to
quickly adjust production levels with only minor adjustments in the
equipment while other products such as apples require several years to
establish a new orchard. Since child care services requires relatively few
skills compared to the those of a physician, the supply elasticity of child
care services is more elastic than that of physician services.
 Time - Time is a key determinant of supply. In the case of apples and
some other agriculture products, the immediate elasticity of supply is very
inelastic, i.e., there are only so many apples available for sale today.
However, with time producers are able to respond to the increase in
price, manufacturing firms can build new facilities, farmers can plant
additional acres to the particular crop. Thus in time, the elasticity of
supply becomes more elastic.

 Production Capacity - If a firm is already operating at full capacity, then
to increase supply would require building additional facilities and
purchasing new equipments. A firm that is operating at below full
capacity, can respond to a price increase quicker than a firm that is
already at full capacity.
 Input substitution -- Flexibility and Mobility
 Another determinant in the elasticity of supply is input substitution.
As the price of a good increases, how easily can inputs that were
used in the production of another good be switched over to
producing the good with the higher price?
P
Q
Short run
Intermediate run
Long run

Oil and elasticity of supply
 World supply of oil following a
large rise in world demand
Variable amount of spare
capacity among the major
oil producers
Can oil stocks be put onto
the market to meet the rise
in demand?
Oil supply might be inelastic
if current output is close to
capacity

Elasticity of supply of new housing
 The supply of new housing
 Planning permission + availability of land to develop + shortages of
skilled labour
 Time lags in the production process – new housing developments
take months to complete

Elasticity of supply of drugs
Short term supply is dependent on stocks of product available
If stocks are low, supply cannot increase in the short term to
meet demand
Debate over the use of patents and how this limits production
in the long run

The End
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Elasticity of Supply

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