Elasticity of Supply

In economics, the price elasticity of supply is defined as a numerical measure of the responsiveness of the quantity supplied of product to a change in price of product alone.

It is measured as the percentage change in supply that occurs in response to a percentage change in price. For example, if, in response to a 10% rise in the price of a good, the quantity supplied increases by 20%, the price elasticity of supply would be 20%/10% = 2. (Case & Fair, 1999: 119).

The quantity of a good supplied can, in the short T term, be different from the amount produced, as manufacturers will have stocks which they can build up or run down. In the long run, however, quantity supplied and quantity produced are synonymous.

Various research methods are used to calculate price elasticity


According to the Book

The elasticity of supply measures how much the quantity supplied of a good responds to the change in price of that good, computed as a percentage change in price.

Book Example:
Beachfont land has an inelastic supply because it is almost impossible to produce more of it.



How do you find the elasticity of supply?

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Here's An Example

For example, suppose that an increase in the price of milk from $2.85 to $3.15 a gallon raises the amount that dairy farmers produce from 9,000 to 11,000 gallons per month. Using the midpoint method we calculate the percentage change in price as
For example, suppose that an increase in the price of milk from $2.85 to $3.15 a gallon raises the amount that dairy farmers produce from 9,000 to 11,000 gallons per month. Using the midpoint method we calculate the percentage change in price asFor example, suppose that an increase in the price of milk from $2.85 to $3.15 a gallon raises the amount that dairy farmers produce from 9,000 to 11,000 gallons per month. Using the midpoint method we calculate the percentage change in price as

Percentage change in price = (3.15-2.85) / 3.00 X 100 = 10 percent.


Percentage change in quantity supplied is also calculated by

Percentage change in quantity supplied = (11,000-9,000) / 10,000 X 100 = 20 Percent
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Graphical Representation of Elasticity of Supply

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Sample Test Question!


Suppose that gasoline prises increased from $2.00 to $2.50. Because of the increase the price the supply is changed from 10,000 to 12,000 gallons.

What is the price elasticity of supply?


How to get to the Correct Answer:

Percentage change in price: (2.50 - 2.00) / 2.25 X 100 = 22.2 percent

Percentage change in quantity supplied: (12,000 - 10,000) / 11,000 X 100 = 18.2 percent

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References:
Mankiw, Gregory. Principles of Microeconomics. Aplia. 26 Jan. 2007 www.aplia.com
Case, Karl E. & Fair, Ray C. (1999). Principles of Economics (5th ed.). Prentice-Hall. ISBN 0-13-961905-4.