Elasticity

Price Elasticity of Supply

The price elasticity of supply reflects the sensitivity of producers to changes in price.
Much as consumers respond to changes in the price of a good by changing their demand for it, producers respond to changes in the price of a good by changing the amount of it supplied. The law of supply, which states that all other things being equal, an increase in the price of a good will result in an increase in the quantity of the good supplied, means the quantity supplied has a positive or direct relationship with price. The price elasticity of supply is a measure of how responsive the quantity supplied of a good is to changes in its price. Price elasticity of supply (ES) is calculated by dividing the percentage change in quantity supplied (QS) by the percentage change in price (P).
ES=%ΔQS%ΔPE_S=\frac{\%\Delta Q_S}{\%\Delta P}
Because of the positive relationship between price and quantity supplied, the price elasticity of supply will usually be greater than or equal to zero.
For example, if the price of fingernail clippers suddenly dropped by 50%, the number of fingernail clippers produced (the supply) would also drop. If the quantity supplied dropped by 30%, the price elasticity of supply would be 30%50%=+0.6\frac{-\;30\%}{-\;50\%}\;=\;+\;0.6 .

Classifying the Price Elasticity of Supply

Supply is elastic when the price elasticity of supply is greater than 1; when the price elasticity of supply is less than 1, supply is inelastic.

Like demand, supply can be classified as as being elastic or inelastic. Elastic supply occurs when the quantity of a good or service that producers supply is relatively sensitive to changes in price; the percentage change in price is not as large as the percentage change in quantity supplied. This means that if the price of a good or service decreases by 10%, sellers reduce their quantity supplied by more than 10%. In this case, sellers are relatively sensitive to changes in the price of their product because the price greatly impacts the change in quantity.

Inelastic supply arises when the supply of a good or service does not change according to the price of that good or service. When it is calculated, the price elasticity of supply is less than 1. In this case, a 10% increase in the price of a good causes sellers to increase the quantity supplied by less than 10%. Thus, the sellers are relatively insensitive to price changes, because price changes do not greatly impact the quantity.

For example, suppose there is a 10% increase in the price of goat cheese. Farms then decide to increase their production by 5%. This means there is a price elasticity of supply (which is inelastic):
+5%+10%=+0.5\frac{+\;5\%}{+\;10\%}\;=\;+\;0.5
.

Extreme Cases of the Price Elasticity of Supply

Theoretically, price elasticity of supply can range from zero (perfectly inelastic) to infinity (perfectly elastic).

When any change in price causes an infinite change in supply, there is a perfectly elastic supply. In this case, sellers are so sensitive to a drop in the price of their product that they reduce the quantity supplied to zero. The supply curve is a horizontal line. This is a hypothetical extreme that does not exist in reality, because it is difficult to make an infinite amount of a product, and situations often change.

A perfectly inelastic supply does not change in response to changes in price; that is, the price elasticity of supply is equal to zero. Here, any change in price of a good or service leads to no change in the quantity supplied; the supply curve is vertical. For example, there is only one of each painting by Leonardo da Vinci; each piece is all that can be supplied to the market, regardless of price.
When the price elasticity of supply is infinite, supply is a perfectly elastic. Sellers are so sensitive to a drop in the price that they reduce the quantity supplied to zero. When the price elasticity of supply is equal to zero, supply is perfectly inelastic. Regardless of a change in price, there is no change in quantity supplied.