What price elasticity of supply measures
The law of supply says that when the price of a good rises, sellers offer more of it. Price elasticity of supply tells you how much more, in percentage terms.
Price elasticity of supply (PES) measures how responsive the quantity supplied is to a change in the good’s own price:
PES = (percentage change in quantity supplied) ÷ (percentage change in price)
Price and quantity supplied move in the same direction, so PES is positive. You do not need to drop a minus sign as you do for demand.
The idea is the same as in Topic 2.3. Percentages let you compare goods measured in different units, and they tell you how strong the response is compared with the size of the price change. If the price of a good rises by 10% and the quantity supplied rises by 3%, PES = 3 ÷ 10 = 0.3.
Elastic, inelastic and unit elastic supply
The benchmark is again 1, where quantity supplied changes by the same percentage as price.
| Value | Description | Meaning |
|---|---|---|
| PES > 1 | elastic | quantity supplied changes by a larger percentage than price |
| PES < 1 | inelastic | quantity supplied changes by a smaller percentage than price |
| PES = 1 | unit elastic | the two percentage changes are the same size |
| PES = 0 | perfectly inelastic | quantity supplied cannot change: a vertical supply curve |
| PES infinite | perfectly elastic | sellers supply any quantity at one price and nothing below it: a horizontal supply curve |
As with demand, a classification is for a price range, not a whole curve.
Supply is close to perfectly inelastic when the quantity really is fixed for the period you study: the seats in a concert hall on the night of a concert, the land in a city centre, or the paintings of an artist who has died. Supply is close to perfectly elastic when firms can produce extra units at the same cost for as long as they like, for example a simple product with plenty of spare factory space and inputs that can always be bought at the same price.
The midpoint method for supply
Use the same midpoint formulas as for demand:
- % change in Qs = (Q₂ − Q₁) ÷ [(Q₁ + Q₂) ÷ 2] × 100
- % change in P = (P₂ − P₁) ÷ [(P₁ + P₂) ÷ 2] × 100
- PES = % change in Qs ÷ % change in P
The midpoint method gives the same answer whether the price rises or falls. As with demand, do not divide the raw change in quantity by the raw change in price. That is a slope-type ratio, not an elasticity.
Shape of the supply curve
A flatter supply curve is more elastic than a steeper one when you compare them at the same point. But, as with demand, slope is not elasticity. On a straight-line supply curve, the elasticity usually changes from one price range to another.
Background (not required by the course, but a useful check). For a straight-line supply curve, where it starts tells you whether supply is elastic or inelastic:
You will see why in Worked example 1. Along S₂, quantity is always the same multiple of price, so both always change by the same percentage.
What makes supply more or less elastic
Supply elasticity depends on how easily and cheaply firms can change their output.
| Factor | More elastic when… | Less elastic when… |
|---|---|---|
| Time to adjust | firms have months or years to hire, buy machines, build capacity, and new firms can enter | the period is very short, so output is mostly fixed |
| Spare capacity | factories, staff and machines are not fully used | firms are already working at full capacity |
| Price and availability of inputs | extra inputs, or alternative inputs, can be bought easily at a steady price | extra inputs are scarce, so their price rises sharply as firms try to buy more |
| Stocks (inventories) | the good can be stored, so sellers can release stock when the price rises | the good is perishable or cannot be stored |
| Production time | the good can be made quickly | the good takes a long time to make (crops, trees, ships) |
The input factor is worth a closer look. A bakery that can switch between several flours, all sold at stable prices, can raise output without its costs jumping, so its supply is elastic. A jeweller who needs a rare gemstone faces a steep rise in the gem’s price as soon as it tries to buy more, so each extra unit is costly and supply is inelastic.
Time is the most important factor. Economists often compare supply in the short run, when some inputs are fixed, with supply in the long run, when all inputs can change and firms can enter or leave. Worked example 2 shows the difference.
Worked example 1: elasticity along a straight-line supply curve
Question. Fernhill Printworks, a fictional poster printer, has this supply schedule:
| Price ($ per poster) | 4 | 6 | 8 | 10 |
|---|---|---|---|---|
| Quantity supplied (posters per week) | 100 | 200 | 300 | 400 |
(a) Calculate PES when the price rises from $4 to $6. (b) Calculate PES when the price rises from $8 to $10. (c) Classify supply in each range. What do you notice, and why?
(a) From $4 to $6:
- Change in Qs = 200 − 100 = 100. Average Qs = (100 + 200) ÷ 2 = 150. % change in Qs = 100 ÷ 150 × 100 = 66.67%.
- Change in P = 2. Average P = (4 + 6) ÷ 2 = 5. % change in P = 2 ÷ 5 × 100 = 40%.
- PES = 66.67 ÷ 40 = 1.67.
(b) From $8 to $10:
- Change in Qs = 100. Average Qs = 350. % change in Qs = 100 ÷ 350 × 100 = 28.57%.
- Change in P = 2. Average P = 9. % change in P = 2 ÷ 9 × 100 = 22.22%.
- PES = 28.57 ÷ 22.22 = 1.29.
(c) Both values are greater than 1, so supply is elastic in both ranges. But the value falls (1.67, then 1.29) even though every $2 rise adds the same 100 posters. The raw changes are constant; the percentages are not.
Check. If you extend the line backwards, quantity supplied falls by 50 posters for each $1, so it reaches zero at a price of $2. The line starts on the price axis, which matches the background rule in Figure 2: elastic at every price. As the price rises, PES moves closer to 1 but never reaches it.
Worked example 2: short run and long run
Question. Orvane Valley is a fictional honey-producing region. Honey sells for $8 per jar and beekeepers supply 900 jars per month. The price rises to $12 and stays there.
- Within a few months, beekeepers can only add a few hives, and output rises to 1,100 jars per month.
- Two years later, existing beekeepers have expanded and new ones have entered. Output is 1,800 jars per month at $12.
(a) Calculate PES in the short run and in the long run. (b) Classify each and explain the difference. (c) Show both on a graph.
(a) The percentage change in price is the same in both cases: (12 − 8) ÷ 10 × 100 = 40%.
Short run: % change in Qs = (1,100 − 900) ÷ 1,000 × 100 = 20%. PES = 20 ÷ 40 = 0.5.
Long run: % change in Qs = (1,800 − 900) ÷ 1,350 × 100 = 66.67%. PES = 66.67 ÷ 40 = 1.67.
(b) Short-run supply is inelastic (0.5 < 1). Bee colonies take time to build up, hives and trained beekeepers are limited, and honey output depends on the season. Long-run supply is elastic (1.67 > 1). With time, beekeepers can buy and build more hives, train staff, and new producers can enter the market.
(c) Both curves pass through A ($8, 900 jars). The short-run curve is steeper and reaches B ($12, 1,100). The long-run curve is flatter and reaches C ($12, 1,800). Because they share point A, the flatter curve is the more elastic one there.
Interpretation. The beekeepers’ revenue rises in both cases: from $7,200 to $13,200 a month in the short run and to $21,600 in the long run. Along a supply curve, a higher price always raises sellers’ revenue, because both price and quantity rise.
Common misconceptions
- “PES is negative, like PED.” Price and quantity supplied move in the same direction, so PES is positive.
- “PES = change in quantity supplied ÷ change in price.” Convert both changes to percentages first.
- “A steep supply curve is always inelastic.” Compare curves only at a common point. On a straight line, elasticity changes from range to range, and steepness also depends on the scale of the axes.
- “Inelastic supply means firms cannot change output at all.” That is perfectly inelastic supply (PES = 0). Inelastic supply means output changes by a smaller percentage than price.
- “Supply elasticity depends on whether buyers have substitutes.” Substitutes are a demand factor. Supply elasticity depends on the sellers’ side: time, spare capacity, inputs, stocks and production time.
- “The total revenue test works for supply too.” Along a supply curve, a price rise always raises sellers’ revenue, so there is no test to apply.
Where this leads
Next, Topic 2.5 measures other elasticities: how demand responds to income and to the prices of related goods. Later topics combine the elasticities of supply and demand to explain how much prices and quantities change, and who bears a tax. Test yourself with the practice questions, then use the revision notes and the checklist to consolidate. For the midpoint method and the demand side, look back at the previous topic, price elasticity of demand.
Quick questions
Is there a total revenue test for supply?
No. Along a supply curve a higher price comes with a larger quantity supplied, so sellers' revenue always rises when the price rises. The total revenue test belongs to demand.
What is the most important factor for supply elasticity?
Time. Given longer, firms can hire, buy machines, build new capacity and new firms can enter, so the quantity supplied responds much more to a price change.