Goods and services can be either elastic or inelastic. Elastic means the product is more sensitive to price c♏hanges, such as luxury goods and non-necessary items. Inelastic means the product is less sensitive to price movements—food and gas are examples of inelastic supply goods.

Price elasticity of supply is the responsiveness of a supply of a good or service after a change in its market price. Basic economic theory states that supplies increase when prices rise and drop when prices decrease. This happens because producers want to take advantage of a price rise, so they produce more until demand is exceeded—at which time prices begin to fall. Producers then decrease output to match the price decline.

Formula and ♓Calculation of Price El🀅asticity of Supply

Tౠo💖 find an item's price elasticity of supply, you need to know the percent change in quantity supplied and the percent change in its price.

$\begin{aligned}&\text{PES} = \% \text{CS} \div \% \text{CP}\\&\textbf{where:}\\&\text{PES}=\text{Price elasticity of supply}\\&\text{CS}=\text{Change in supply}\\&\text{CP}=\text{Change in price}\end{aligned}$​PES=%CS÷%CPwhere:PES=Price elasticity of supplyCS=Change in supplyCP=Change in price​

So, imagin🍸e you have a farm that can produce and deliver 500 bushels of corn per quarter. The price for one bushel in the first quarter was $157.56. In the second quarter, one bushel was $159.25, and your farm prod🍌uced and delivered 505 bushels.

First, determine the percent change in price:

• $159.25 - $157.56 = 1.69
• 1.69 ÷ $157.56 = 0.0107
• 0.0107 x 100 = 1.07%

Then, the percent change in supply:

• 505 - 500 = 5
• 5 ÷ 500 = 0.01
• 0.01 x 100 = 1.0%

Use the formula to calculate price elasticity:

1.0% ÷ 1.07% = 0.000107

A result of 0.0001 shows that your farm's corn price elasticity of supply is very low or inelastic. But if your farm produced 525 bushels in the second quarter, the elasticity would change, but still be 澳洲幸运5官方开奖结果体彩网:inelastic:

• 525 - 500 = 25
• 25 ÷ 500 = 0.05, or 5%
• 1.0% ÷ 5% = 0.2

Fast Fact

A good or service's price affects the quantity demanded. Demand drops when its price goes up and demand increases when the price goes down.

Elasticity of Supply Possibilities

Price elasticity of supply has five possibilities:

• Perfectly Elastic: The result is an infinite number.
• Elastic: The result is greater than one.
• Unitary: The result equals one.
• Inelastic: The result is less than one.
• Perfectly Inelastic: The result is equal to zero.

🍒So, if the corn from your farm has a price elasticity of sup🌠ply equal to 0.2, it is inelastic.

Perfectly Elastic Supply

The PES for perfectly elastic supply is infinite, where the quantity supplied is unlimited at a given price, but no quantity can be supplied at any other price. There are virtually no real-life examples of this, where even a small price change would dissuade or disallow product makers from supplying even a single product.


Elastic Supply

A price elasticity supply greater than one means supply is elastic, where the quantity supplied changes by a larger percentage than the price change. An example would be a product that’s easy to make and distribute, such as a fidget spinner. The resources to make additional spinners are readily available, and the total cost would be minimal to ramp production up or down.


Unitary Elastic Supply

Unitary Elasticity Supply has a PES of one, where the quantity supplied changes by the ꦫsame percentage as the price change.

Inelastic Supply

The PES for relatively inelastic supply is between zero and one. That means the percentage change in quantity supplied changes by a lower percentage than the percentage of price change. An inelastic example is nuclear power, which has a long lead time given the construction, technical know-how, and long ramp-up process for plants.


Perfectly Inelastic Supply

Perfectly inelastic supply is when the PES formula equals zeroღ. That is, there is no change in quantity supplied when the price changes. Examples include products that have limited quantities, such as land or a painting from deceased artists. The amount of gold on earth, for instance, is finite.

Likewise, the number of Bitcoins to ever be mined is capped. As a result, at some point, there cannot be an increase in supply regardless of the price for these two assets. Therefore, their elasticity of supply could become perfectly inelastic in the future.


Price Elasticity of Supply vs. Demand

Price elasticity of supply refers to how responsive supply is to price changes—澳洲幸运5官方开奖结果体彩网:price elasticity of demand (PED) refers to how responsive demand is to price changes.


While price elasticity of supply is related to producer behavior, where producers increase and decrea𒈔se supply due to price, PE🙈D is related to consumer behavior. The theory behind PED is that consumers will demand less when prices go higher.

What Does Elasticity of Prices Mean?

Elasticity of prices refers to 澳洲幸运5官方开奖结果体彩🉐网:how much 🌠supply and/or demand for a good changes as its price changes. Highly elastic goods see their supply or deman💯d change rapidly with relatively small price changes.

Why Do Suppliers Increase Production When Prices Rise?

Rising prices often signal that demand is outpacing supply for a given product, meaning that the market could absorb more supply. Moreover, firms can profit by selling more goods at relatively higher prices, at least until the newly available supply leads prices to fall baꦗck down.

What Does Perfectly Inelastic Mean?

When a good has zero elasticity, it is called "perfectly" inelastic. This means the product's supply and/or demand will not change, even as its price changes. Rare paintings, especially those by a deceased or notable artist, are considered an example of perfectly inelastic supply. Insulin for diabetics is an example of a good with perfectly inelastic demand.

The Bottom Line

Companies hope to keep their price elasticity of supply high to remain 𝓀nimble should the price of their products shift. That is, they want to be able to capture more profit should prices rise or trim production should prices fall. To 🔜help boost PES, companies can do several things.

These include improving the technology used, such as upgrading equipment and software to improve efficiency. Improved capacity and capacity on hand also boost PES, including boosting the stock on hand and expanding storage space and systems. Beyond that, improving how products are shipped and distributed canಞ help. PES can also be increa꧂sed by ensuring products can last long while stored.