Price Elasticity of Supply

Managerial Economics
Semester 1
What is Price Elasticity of Supply
 Price elasticity of supply is the measure of the responsiveness in
quantity supplied to a change in the price of a specific good

Elastic Supply – Quantity supplied responds substantially to changes

in price

Inelastic Supply – Quantity supplied responds only slightly to changes

in price
 Supply Elasticity - Measurement

% change in quantity Supplied = ΔQs/Qs Using Arc elasticity method, we get

% change in price = Δ P/P
Es =
PES =
PES = =

Qs varies directly with P, hence PES is positive

Elastic Supply
Relatively Elastic Supply

>
PES >1

Perfectly Elastic Supply

At existing price, there is an
infinite supply

Perfectly elastic demand may be associated with labour markets and is assumed to be the case with
perfectly competitive labour markets
Supply Elasticity - Types
Relatively Inelastic Supply

<
0< PES < 1

Perfectly Inelastic Supply

A change in price does not
Create any change in quantity
supplied
This may happen with certain
goods in the short run
PES = 0
 A high marginal production Time Period – Elasticity of supply
cost is low in the short run
(the additional cost of and higher in the long run
producing an additional unit
of output)
lowers elasticity of supply Capacity – If firms have spare
Determinants of productive
Supply Elasticity capacity, output can be
increased
quickly without much increase in
Number of firms in the market costs
– Higher the number,
greater the elasticity
Mobility of factors of production –
Greater mobility allows for greater
increase in output
in response to a higher price
Solve
The coefficient of elasticity of supply of a good is 2. What quantity of the
commodity would the seller supply at a price of Rs.5 per unit, if he
supplies 80 units at Rs. 4 per unit?

Elasticity of supply =
2= x
160 = 4
= 40
With a rise in price to Rs.5, the quantity supplied will increase
from 80 to
80 + 40 = 120