Elasticity Of Supply

Definition:
Elasticity means responsiveness. Thus, elasticity of supply means the
responsiveness of supply due to some changes to the factors which influence
supply.
There is only one types of elasticity of supply:
1. Price Elasticity of Supply (PES) - (ES)
Thus,
a. Definition of PES:
It measures the responsiveness of quantity supplied due to a change in its
price.

b. Formula :
i. ES = % ∆ in Qty supplied for product A (Percentage Method)
% ∆ in price for product A
ES = % ∆Q
% ∆P

ii. ES = ∆Q × (P0 +P1)/2 (Mid Point Method)

∆P (Q0 + Q1)/2

ES = (Q1 − Q0) × (P0 +P1)/2

(P1 − P0) (Q0 +Q1)/2

c. Objective for PES or Degrees of PES:

Once we have calculated the PES then we need to interpret the coefficient
value. For PES coefficient there are degrees of PES:
 Elastic Supply, (1<Es < ∞)
 Inelastic Supply, (0< Es < 1)
 Unitary Elastic Supply, (Es = 1)
 Perfectly Inelastic Supply, (Es = 0)
 Perfectly Elastic Supply, (Es = ∞)

OR
0 1 ∞

Perfectly Inelastic Unitary Elastic Perfectly

Inelastic Elastic
1
Example 1:

If the price of product Y has increased by 10% then the quantity supplied
has increased by 20%. Calculate the price elasticity of supplied when price
increases.
% ∆P = 10%
% ∆Q = 20%

Es = % ∆Q
% ∆P
Es = 20%
10%

Es = 2 (Since 1<Es < ∞ , the supply curve is elastic)

Example 2:

Given the price of product X is RM 4 and the quantity supplied is 12 units.

When the price of product X increases to RM 5 the quantity supplied is 18
units. Calculate the price elasticity of supplied when price increases.
p0 = RM4 q0 = 12
p1 = RM5 q1 = 18

Es = (Q1 − Q0) × (P0 +P1)/2 (Mid Point Method)

(P1 − P0) (Q0 +Q1)/2

Es = (18 − 12) × (4 + 5)/2

(5 − 4) (12 + 18)/2
= 6×9
1 30
= 1×9
1 5
Es = 1.8 (Since 1<Ed < ∞ , the supply curve is elastic)