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).
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
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
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
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
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%) = ∞
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).
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Date of last modification: 2019