Price Elasticity of Supply - Online Tutor, Practice Problems & Exam Prep

Price elasticity of supply measures how quantity supplied responds to price changes, calculated using the midpoint method. The formula is ΔQ_sΔP, where ΔQ_s is the change in quantity supplied and ΔP is the change in price. A result less than 1 indicates inelastic supply, meaning quantity supplied changes less than price. For example, if the price of ice cream rises from $4 to $6 and quantity supplied increases from 90,000 to 110,000, the price elasticity of supply is 0.5, indicating inelasticity.

Price Elasticity of Supply

So now let's discuss how elasticity relates to supply curves. So up to now, we've been doing a lot of demand curve stuff, but now let's talk about price elasticity of supply, and guess what? Pretty much everything we do is going to be exactly the same. So lucky us, we're still going to be using our midpoint method here. Except now we're talking about supply, right? The idea here is that instead of having quantity demanded in the numerator, look at our formula, right? We've got quantity supplied in the numerator, but we still got price in the denominator, right? It's called price elasticity of supply, price in the denominator, right? This is how does quantity supplied respond to a change in price, right? How much is that quantity supplied going to change? Is it going to change a lot when the price goes up? Is it only going to change a little when the price goes up? Right. So we've got our same shorthand that we've been using here. On the right, percentage change in quantity supplied over percentage change in price, right? So really, our steps here are going to be the same as price elasticity of demand, except now we're just using quantity supplied. Again, just like with price elasticity of demand, our positives and negatives don't matter in this case because we're always going to get a positive number with quantity supplied, right? Remember the law of supply, when the price goes up, quantity supplied goes up. So they're both positive, we're always going to get a positive number, signs don't matter. So let's go ahead and do an example here where we're going to calculate price elasticity of supply, and it should seem very familiar to you, in the steps we're doing. So when the price of ice cream rises from $4 a tub to $6 a tub, the quantity supplied increases from 90,000 to 110,000. What is the price elasticity of supply of ice cream? So we are just going to use our 5 steps. There's no 6th step about positive or negative here because it's always positive. Easy peasy. Let's go ahead and do it. So I'm going to go ahead and circle my quantities here in blue like we've been doing and our prices in green, keep everything nice and separate. So I'm going to have a column here for quantity supplied, right, not quantity demanded this time, and a column for price. So let's start with step 1 where we're going to subtract the 2 quantities, subtract the 2 prices. Do it the easy way, bigger minus smaller because signs don't matter. Alright. 20,000 is our difference. Price, 6 minus 4, 2. Alright. Step 2, we're going to add. Isn't this nice how similar all of our calculations have become? 110 plus 90 is going to give us 200,000 and price we've got 6 plus 4 equals 10. Step 3, we're just going to divide by 2. Our answer from step 2. Right? 200,000 divided by 2, 100,000, and 10 divided by 2 equals 5. Step 4 is where we're actually going to get our percentage changes in each. So for quantity supplied, it's step 1 divided by step 3. 20,000 divided by 100,000 that's going to give us 0.2 is our percentage change in quantity supplied in this case, right? And let's do the same thing with price. We've got step 1 was 2, step 3 was 5, 2-fifths is 0.4. So a 40% change in price and a 20% change in quantity supplied. Step 5, that's just where we're going to plug it into our actual equation of quantity supplied divided by price here. So we're going to get 0.20.4 which is going to give us half here. Right. 0.5 is our answer. We don't have to worry about signs, positive or negative doesn't matter. That is going to be our answer, but now how do we analyze this? Guess what? It's the same as before. This is going to be inelastic, right? We got a number less than 1, it's going to be inelastic. Our supply is inelastic at this point. The quantity supplied rose less in percentage than the price, right? The price rose 40% here, but the quantity supplied only grew by 20%. It's inelastic. So we've got our same kind of summary down here, which is the same as we should remember where it's going to be elastic, and in this case I'm going to put e with a small s, that's elasticity of supply, right? Our price elasticity of supply is greater than 1, that is going to be elastic. Elasticity of supply less than 1, that is going to be inelastic like we got in our problem and unit elastic just like before, elasticity of supply equals 1. Cool. It's great how similar all of these calculations have been, right? Alright. Let's go ahead and do a little bit of practice related to price elasticity of supply.

The price elasticity of supply measures the responsiveness of:

• A. Quantity supplied to changes in price
• B. Quantity demanded to changes in supply
• C. Quantity supplied to changes in income
• D. Quantity supplied to changes in demand

If a one percent decrease in the price of a pound of pound cake causes a three percent decrease in the quantity of pound cake supplied:

• A. Demand is inelastic
• B. Demand is elastic
• C. Supply is inelastic
• D. Supply is elastic

If a decline in the price of flags $9 to $7, caused by a shift in the demand curve, decreases the quantity of flags supplied from 5,500 to 4,500, the:

• A. Demand for flags is elastic
• B. Supply of flags is elastic
• C. Demand for flags is inelastic
• D. Supply of flags is inelastic

Here’s what students ask on this topic:

What is the price elasticity of supply and how is it calculated?

Price elasticity of supply measures how the quantity supplied of a good responds to changes in its price. It is calculated using the midpoint method, which involves the formula:

$\frac{∆Q_s}{∆P}$

Here, $∆Q_s$ is the change in quantity supplied and $∆P$ is the change in price. For example, if the price of ice cream rises from $4 to $6 and the quantity supplied increases from 90,000 to 110,000, the price elasticity of supply is calculated as:

$\frac{(110000-90000)}{(6-4)}=\frac{20000}{2}=\; 0.5$

This indicates inelastic supply, as the value is less than 1.

What does it mean if the price elasticity of supply is less than 1?

If the price elasticity of supply is less than 1, it indicates that the supply is inelastic. This means that the quantity supplied changes less than the change in price. For instance, if the price of a product increases by 40% but the quantity supplied only increases by 20%, the price elasticity of supply would be 0.5. This suggests that producers are not very responsive to price changes, possibly due to factors like production constraints or limited availability of resources.

How does the midpoint method work in calculating price elasticity of supply?

The midpoint method is used to calculate price elasticity of supply by averaging the starting and ending prices and quantities. The steps are:

1. Calculate the change in quantity supplied and price: $∆Q_s$ and $∆P$.

2. Find the average quantity and price: $\frac{(Q_1+Q_2)}{2}$ and $\frac{(P_1+P_2)}{2}$.

3. Divide the change by the average to get the percentage change.

4. Use the formula: $\frac{∆Q_s}{∆P}$.

This method provides a more accurate measure of elasticity over a range of prices.

What factors affect the price elasticity of supply?

Several factors affect the price elasticity of supply:

1. **Production Time**: Goods that take longer to produce tend to have inelastic supply.

2. **Availability of Resources**: If resources are readily available, supply is more elastic.

3. **Flexibility of Production**: If firms can easily switch production processes, supply is more elastic.

4. **Storage Capabilities**: Goods that can be stored easily tend to have more elastic supply.

5. **Time Period**: Supply is generally more elastic in the long run as firms can adjust their production capacities.

Understanding these factors helps in predicting how supply will respond to price changes.

How is price elasticity of supply different from price elasticity of demand?

Price elasticity of supply measures how the quantity supplied of a good responds to changes in its price, while price elasticity of demand measures how the quantity demanded responds to price changes. The formula for both is similar, but for supply, the focus is on quantity supplied:

$\frac{∆Q_s}{∆P}$

For demand, it is:

$\frac{∆Q_d}{∆P}$

Additionally, supply elasticity is always positive due to the law of supply, whereas demand elasticity can be negative due to the inverse relationship between price and quantity demanded.