The Price Elasticity of Supply

The price elasticity of supply is a measure of the extent to which the quantity supplied of a good changes when the price of the good changes and all other influences on sellers’ plans remain the same.
A. Elastic and Inelastic Supply
1. The price elasticity of supply falls into three categories:
a. Elastic supply—when the percentage change in the quantity supplied exceeds the percentage change in price.
b. Unit elastic supply—when the percentage change in the quantity supplied equals the percentage change in price.
c. Inelastic supply—when the percentage change in the quantity supplied is less than the percentage change in price.
2. There are two extreme cases of price elasticity of supply:
a. Perfectly elastic supply—when the quantity supplied changes by a very large percentage in response to an almost zero percentage change in price
b. Perfectly inelastic supply—when the quantity supplied remains constant as the price changes.
B. Influences on the Price Elasticity of Supply
1. Production possibilities
a. How rapidly the cost of increasing production rises and the time elapsed since the price change influence the elasticity of supply. The more rapidly the production cost rises and the less time elapsed since a price change, the more inelastic the supply.
2. Storage possibilities
a. Storable goods have a more elastic supply than goods that cannot be stored.

C. Computing the Elasticity of Supply
1. The formula used to calculate the price elasticity of supply is:
Price elasticity of supply = Percentage change in quantity supplied
                                            Percentage change in price

a. If the price elasticity of supply is greater than 1 (the numerator is larger than the denominator), supply is elastic.
b. If the price elasticity of supply is equal to 1 (the numerator equals the denominator), supply is unit elastic.
c. If the price elasticity of supply is less than 1 (the numerator is less than the denominator), supply is inelastic.