Price Elasticity of Supply: Videos & Practice Problems

Price elasticity of supply (PES) measures how the quantity supplied of a good responds to changes in its price. It is calculated using the midpoint method, which involves the following steps:

1. Calculate the change in quantity supplied and the change in price.

2. Find the average quantity supplied and the average price.

3. Divide the change in quantity supplied by the average quantity supplied to get the percentage change in quantity supplied.

4. Divide the change in price by the average price to get the percentage change in price.

5. Divide the percentage change in quantity supplied by the percentage change in price.

The formula is:

$\frac{\%∆Q}{\%∆P}$

A value less than 1 indicates inelastic supply, while a value greater than 1 indicates elastic supply.

The law of supply states that, all else being equal, an increase in price results in an increase in quantity supplied. Price elasticity of supply (PES) quantifies this relationship by measuring how much the quantity supplied changes in response to a change in price. If PES is greater than 1, supply is elastic, meaning quantity supplied changes significantly with price changes. If PES is less than 1, supply is inelastic, meaning quantity supplied changes little with price changes. This helps businesses and economists understand how responsive producers are to price changes, which is crucial for making production and pricing decisions.

Several factors affect the price elasticity of supply (PES):

1. **Time Period**: Supply is more elastic in the long run as producers have more time to adjust production levels.

2. **Availability of Inputs**: If inputs are readily available, supply is more elastic because producers can increase output more easily.

3. **Flexibility of Production**: If a firm can easily switch between different products, supply is more elastic.

4. **Spare Capacity**: Firms with spare capacity can increase production without a significant rise in costs, making supply more elastic.

5. **Storage Ability**: Goods that can be stored easily have more elastic supply because producers can respond to price changes by releasing or withholding stock.

Elastic supply refers to a situation where the quantity supplied changes significantly in response to price changes. This is indicated by a price elasticity of supply (PES) greater than 1. In contrast, inelastic supply means that the quantity supplied changes very little in response to price changes, indicated by a PES less than 1. For example, if the price of a product increases by 40% and the quantity supplied increases by only 20%, the supply is inelastic. Understanding whether supply is elastic or inelastic helps businesses and policymakers make informed decisions about production and pricing strategies.

The value of price elasticity of supply (PES) indicates how responsive the quantity supplied is to a change in price:

1. **PES > 1**: Supply is elastic. Quantity supplied changes more than the price change.

2. **PES < 1**: Supply is inelastic. Quantity supplied changes less than the price change.

3. **PES = 1**: Supply is unit elastic. Quantity supplied changes exactly in proportion to the price change.

For example, if PES is 0.5, a 10% increase in price will result in only a 5% increase in quantity supplied, indicating inelastic supply. This helps in understanding how producers might react to price changes.