Elasticity of Supply
Elasticity of supply measures the responsiveness of the quantity supplied of a good or service to a change in its price. It is a central concept in microeconomics and is closely related to the elasticity of demand.[1]
Price elasticity of supply
The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price:
- PES = (% change in quantity supplied) ÷ (% change in price)
Because quantity supplied generally rises when price rises, the price elasticity of supply is normally positive.[1]
Categories
| Value | Category | Meaning |
|---|---|---|
| PES > 1 | Elastic | Quantity supplied responds proportionally more than price. |
| PES = 1 | Unit elastic | Quantity supplied responds proportionally to price. |
| PES < 1 | Inelastic | Quantity supplied responds proportionally less than price. |
| PES = 0 | Perfectly inelastic | Quantity supplied is fixed regardless of price. |
| PES = ∞ | Perfectly elastic | Any price decrease reduces supply to zero. |
Determinants
The elasticity of supply depends chiefly on:
- Time period — supply is more elastic in the long run, when firms can adjust all inputs, than in the short run.
- Spare capacity — firms with unused capacity can increase output more easily.
- Availability of inputs — ease of obtaining labour, materials, and equipment.
- Storage and mobility — the extent to which goods can be stored or factors moved between uses.
Importance
The elasticity of supply, together with the elasticity of demand, determines how the burden of a tax is shared between producers and consumers and how quickly markets adjust to shifts in demand. It also matters for understanding the sources of inflation: when supply is inelastic, demand shocks produce larger price increases.[1]