Price Elasticity of Supply

In Economics, Price Elasticity of Supply is the responsiveness of quantity supplied when the price of the good changes. It the ratio of the percentage change in quantity supplied to the percentage change in price. Price Elasticity of Supply is always positive, because the Law of Supply says that quantity supplied increases with an increase in price.

  • If supply is elastic, producers can increase output without a rise in cost or a time delay
  • If supply is inelastic, firms find it hard to change production in a given time period.

Price Elasticity of Supply

Price Elasticity of Supply Formula

To calculate the price elasticity of supply, use the following formula:

Price Elasticity of Supply (PES) = Percentage Change in Quantity Supply to the Percentage Change in Price

Price Elasticity of Supply Formula

= %Δ in Qs/ %Δ in Price

= ((New Quantity Supplied – Old Quantity Supplied)/(Old Quantity Supplied)) / ((New Price – Old Price)/(Old Price))

Price Elasticity of Supply Example Problem

Given the following data for the supply and demand of movie tickets, calculate the price elasticity of supply when the price changes from $9.00 to $10.00.

Price Elasticity of Supply Example Problem

We know that the original price is $9 and the new price is $10, so we have Price (Old) =$9 and Price (New) = $10. From the chart we see that the quantity supplied, when the price is $9 is 75 and when the price is $10 is 105.

So we have:

Price (Old) = $9
Price (New) = $10
Quantity Supplied (Old) = 75
Quantity Supplied (New) = 105

To calculate the price elasticity of supply for movie tickets, we need to know what the percentage change in quantity supplied is and what the percentage change in price is.

Calculating the Percentage Change in Quantity Supply

The formula used to calculate the percentage change in quantity supplied is:

[Quantity Supplied (New)Quantity Supplied (Old)] /Quantity Supplied (Old))

[105 – 75] / 75 = (30/75) = 0.4

So we note that % Change in Quantity Supplied = 0.4

Now we need to calculate the percentage change in price.

Calculating the Percentage Change in Price

The formula used to calculate the percentage change in price is:

[Price (New) – Price (Old)] /Price (Old))

By filling in the values we wrote down, we get:

[10 – 9] / 9 = (1/9) = 0.1111

We have both the percentage change in quantity supplied and the percentage change in price, so we can calculate the price elasticity of supply.

Calculating the Price Elasticity of Supply

PES = (% Change in Quantity Supplied)/(% Change in Price)

We now fill in the two percentages in this equation using the figures we calculated.

PEoD = (0.4)/(0.1111) = 3.6

We get that the price elasticity of supply when the price increases from $9 to $10 is 3.6. So for movie tickets, the price is elastic and thus supply is very sensitive to price changes.

Five Determinants of Price Elasticity of Supply

Marginal Cost

If the cost of producing one more unit keeps rising as output rises or Marginal Costs (which is the increase in cost by producing just one more unit) rises rapidly with an increase in output, then the rate of output production will be limited, i.e. Price Elasticity of Supply will be inelastic, which basically means that the percentage of quantity supplied changes less than the change in price. If Marginal Cost rises slowly, then supply will be elastic.

Time

Over time price elasticity of supply tends to become more elastic, which means that producers would increase the quantity supplied by a larger percentage than an increase in price.

Number of Firms

The larger the number of firms, the more likely supply is elastic.

Mobility of Factors of Production

If factors of production are mobile, then price elasticity of supply tends to be more elastic.

Capacity

If firms have spare capacity, the price elasticity of supply is elastic. They are able to produce more, and quickly with a change in price.

Five Types of Price Elasticity of Supply

These are the ranges of Price Elasticity of Supply.

Perfectly Inelastic Supply

(PES = 0), The Quantity Supplied doesn’t change as the price changes.

Perfectly Inelastic Supply

 

Relatively Inelastic Supply

(0 < PES < 1), Quantity Supplied changes by a lower percentage than a percentage change in price.

Relatively Inelastic Supply

 

Unit Elastic Supply

(PES = 1), Quantity Supplied changes by exactly the same percentage as the change in price.

Unit Elastic Supply

 

Relatively Elastic Supply

(1 < PES < ∞), The Quantity Supplied changes by a larger percentage than the percentage change in price.

Relatively Elastic Supply

 

Perfectly Elastic Supply

(PES =  ∞), Suppliers will be willing and able to supply any amount at a given price but none at a different price.

Perfectly Elastic Supply

Calculating Price Elasticity of Supply


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