Price Elasticity of Supply

Introduction

Price Elasticity of Supply = (% change in Q^s) / (% change in P)

Price elasticity of supply determines how much Q^s responds to a change in P.
Basically, it determines sellers' price-sensitivity.
The midpoint method is used to compute the % changes.

Example

Let's assume that price elasticity of supply = 24% / 8% = 3% (see figure below). price-elasticity-supply

The Variety of Supply Curves

The slope of the supply curve is closely related to price elasticity of supply.
Usually, the flatter the curve, the bigger the elasticity. The steeper the curve, the smaller the elasticity.
5 different classifications will be discussed

Perfectly Inelastic Supply

Price Elasticity of Supply = (% change in Q^s) / (% change in P) = 0% / 15% = 0

Inelastic Supply

nelastic Supply 1
S curve: vertical
Sellers' price sensitivity: none
Elasticity: 0

Inelastic Supply

Price Elasticity of Supply = (% change in Q^s) / (% change in P) = < 15% / 15% < 1

Inelastic Supply 2

Inelastic Supply-2
S curve: relatively steep
Sellers' price sensitivity: relatively low
Elasticity: < 1

Unit Elastic Supply

Price Elasticity of Supply = (% change in Q^s) / (% change in P) = 15% / 15% = 1

Inelastic Supply 3

Inelastic Supply-3
S curve: intermediate slope
Sellers' price sensitivity: intermediate
Elasticity: = 1

Elastic Supply

Price Elasticity of Supply = (% change in Q^s) / (% change in P) = (> 15%) / (15%) > 1

Inelastic Supply 4

Inelastic Supply-4
S curve: relatively flat
Sellers' price sensitivity: relatively high
Elasticity: > 1

Perfectly Elastic Supply

Price Elasticity of Supply = (% change in Q^s) / (% change in P) = (any value) / (0%) = ∞

Inelastic Supply 5

Inelastic Supply-5
S curve: horizontal
Sellers' price sensitivity: extreme
Elasticity: ∞

The Determinants of Supply Elasticity

The easier sellers can change the quantity they produce, the greater the price elasticity of supply.
Example: Supply of oil or electricity is harder to vary and therefore less elastic than supply of cars.

Exercises

Exercise on Elasticity and Changes in Equilibrium

Check your answers here:
Solution to the Exercise on Elasticity and Changes in Equilibrium

How the Price Elasticity of Supply Can Vary

Supply usualy eventually be less elastic when Q increases, because of its capacity limits (see figure below).
How the Price Elasticity of Supply Can Vary