PRICE ELASTICITY OF SUPPLY s

Price Elasticity of Supply

*The size of the change in quantity supplies of a good or service when its price changes.
*It measures producers’ responsiveness to a change in price.

Equation:
% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒔
Price Elasticity of Supply = % 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆

Mid-point Method:
𝑸𝟏+𝑸𝟐 𝑷𝟏+𝑷𝟐
Price Elasticity of Supply = (𝑸𝟐 − 𝑸𝟏)/[ ]/(𝑷𝟐 − 𝑷𝟏)/[ ]
𝟐 𝟐

*The elasticity of supply will always be positive because quantity supplied moves in the
same direction as the price.

 Elastic – greater than 1

 Inelastic – less than 1
 Unit-elastic – exactly 1

Determinants of Price Elasticity of Supply

Availability of Inputs. The elasticity of supply depends on the elasticity of supply of

inputs. If producing more of a good will cost a lot more than the initial quantity did, because
the extra inputs will be harder to find, then the producer will be reluctant to increase the
quantity supplied. Higher and higher prices will be needed to convince the producer to go
to the extra trouble.

Flexibility of the production process. The easiest way for producers to adjust the
quantity supplied of a particular good is to draw production capacity away from other
goods when prices rise, or to reassign capacity to other goods when prices fall. Farmers
may find this substitution relatively simple: When corn prices are high they will plant more
acres with corn; when corn prices are low they will reassign acres to more profitable crops.
Adjustment Time. Supply is more elastic over long periods than over short periods. That
is, producers can make more adjustments in the long run than in the short run.