Price Elasticity of Supply (2024)

Price elasticity of supply is a concept that establishes the relationship between the supply of a particular product or service and its price. This is a quantitative concept and can be calculated in a numerical form. It can be used to find the change in supply with respect to price. It is possible to graphically represent the price elasticity of supply in the form of a supply curve, which helps calculate elasticity. There are different types of price elasticity based on the supply of goods and services. Various factors influence and determine the price elasticity of supply.

Overview of price elasticity of supply

• Price elasticity of supply refers to the relationship between change in the supply of goods and services and change in the price.
• Price elasticity of supply suggests the responsiveness of the quantity of supplied goods to the change in the price of these goods and services.
• This concept is based on the law of supply, which states that there is a direct relationship between the quantity of goods and services supplied and their price.
• The price elasticity of supply can be calculated by establishing the ratio of percentage change in price to the percentage change in supply, that is, the quantity of goods and services produced.
• Numerically, the formula for price elasticity of supply is:

Es=(△Q/Q x 100) ÷(△P/P x 100), where △Q is the change in the quantity of supply and Q is the quantity of supply, △P is the change in the price, and P is the price.

• The price elasticity of supply is represented in the supply curve.

Types of elasticity

• Different types of price elasticity of supply can be represented in the supply curve.

Unitary Elasticity

• Price elasticity of 1 suggests unitary elasticity of supply.
• In unitary elasticity, a price change is equal to the change in supply quantity.

Inelastic Supply

• A price elasticity below 1 is called inelastic supply.
• When price elasticity is zero, the supply is perfectly inelastic.
• In perfectly inelastic supply, the price changes result in little to no change in the quantity of goods supplied.

Price Elasticity

• In numerical terms, when the price elasticity of supply is greater than 1, it is known as a situation of elastic supply.
• When price elasticity is infinite, it is known as a perfectly elastic supply.
• Perfectly elastic supply occurs when the supply increases with little to no change in the price of goods and services.
• Other types of elasticity include relatively less elastic supply, where price elasticity is less than 1, and relatively greater elasticity where price elasticity is greater than 1.
• In a situation of elastic supply, there is a significant increase in demand while the price rise is slight.
• On the other hand, inelastic supply would see a slight increase in demand followed by a considerable price rise.

Factors influencing price elasticity of supply

• Various factors influence the price elasticity of the supply of goods and services.
• The type of industry is a major defining factor in price elasticity. Industries such as toy factories will be more elastic due to the easy production. However, the supply of goods such as precious gems will be less elastic as the production will only rise at a low rate.
• The nature of the commodity being supplied also influences the price elasticity of supply. Goods that can be substituted with other goods will be more elastic.
• Environmental restrictions or production limits can also affect supply. Quick production of goods such as rubber will be challenging due to the time taken by rubber trees to grow.
• Risk-taking by the producer is another factor that influences price elasticity.
• Time also plays a vital role in impacting price elasticity. The supply of goods is more elastic in the short run than in the long run.
• The cost of production is an influencing factor in the price elasticity of supply.
• The technique or method used by producers to produce goods can also determine the price elasticity of supply.

Conclusion

We can define price elasticity of supply as the responsiveness of the quantity of goods supplied to the changes in price. It is the ratio of the percentage change in the quantity of supplied goods to the percentage change in the price of goods. There are various types of elasticity, including perfect elastic, perfect inelastic, relatively less elastic, relatively greater elastic and unitary elastic supply. Various factors influence the elasticity of supply, such as risk-taking, nature of the commodity, nature of production, environmental factors, cost of production and time.