Price Elasticity of Supply Calculator
The price elasticity of supply calculator measures how much the quantity supplied changes after changes in the price of a given good. Our tool not only helps you compute this ratio, but we also explain the price elasticity of supply formula background and show you some practical examples.
Read further and learn the following:
- How to calculate price elasticity of demand and supply;
- What the importance of price elasticity of supply to businesses is;
- What the price elasticity of supply short-run and long-run is; and
- What the determinants of the price elasticity of supply are.
You may also try other elasticity related tools, such as:
What is price elasticity of supply?
The price elasticity of supply measures how responsive the quantity supplied is to the price of a good. It is the ratio of the percent change in the quantity supplied to the percent change in the price as we move along the supply curve.
We define the price elasticity of supply in the same way as the price elasticity of demand, with the only difference being that we consider movements along the supply curve instead of the demand curve.
How do I calculate price elasticity of supply?
We can formulate the price elasticity of supply equation in the following way:
- Find the change in quantity supplied.
- Determine change in price.
- Divide the first value by the second value:
Price elasticity of supply = Change in quantity supplied / Change in price
You can compute the percentage change in the quantity supplied () and price () in two different ways:
- In case of the standard way of computation:
- For the price elasticity of supply midpoint formula:
- - Change in quantity supplied or price;
- - Quantity supplied or price in Period 1; and
- - Quantity supplied or price in Period 2.
How to use the price elastisity of supply formula. Price elasticity of supply examples
So far, we have learned that the price of elasticity of supply measures how much the quantity supplied changes in response to changes in the price. Let's suppose that the price of potatoes rises by 10 percent. In general, depending on the response of the quantity of potatoes supplied, the price elasticity of supply (
PES) will likely fall into three categories:
If the quantity of potatoes supplied also rises by 10 percent in response, the price elasticity of supply for potatoes is 1 (
10% / 10%) and supply is unit-elastic;
If the quantity supplied increases by 5 percent, the price elasticity of supply is 0.5 (
PES = 5% / 10%) and supply is inelastic; and
If the quantity increases by 20 percent, the price elasticity of supply is 2 (
PES = 20% / 10%) and supply is elastic.
There are other possibilities, however, that constitute two extreme cases of price elasticity of supply:
One example is the supply of cell phone frequencies, i.e., the portion of the radio spectrum which can transmit cell phone signals. Since, for technical reasons, it is a fixed quantity, the supply curve is vertical, implying that the quantity supplied doesn't respond to the price (
PES = 0). This is a case of perfectly inelastic supply.
Now, let's consider the supply curve for bread. Suppose that the cost of producing one loaf is 5 dollars, including all opportunity costs. It means that if the price of bread goes under 5 dollars, all bakeries will start losing money and sooner or later go bankrupt. On the other hand, many producers would be happy to produce bread if its price rose above 5 dollars, increasing the supply considerably. The implied supply curve is a horizontal line at 5 dollars in this hypothetical case. Since even a slight rise in the price would increase the quantity supplied, the price elasticity of supply would be close to infinite (
PES = ∞). This is a case of perfectly elastic supply.
How to use the price elasticity of supply calculator
In the default mode of the price elasticity of supply calculator, you need to set the following two parameters to get the result:
- Percent change in price; and
- Percentage change in quantity supplied.
You can also input additional numbers for Periods 1 and 2 separately, and we also provide the option for choosing between the standard and midpoint methods of estimation:
- Method - The standard approximation is selected by default, but you can calculate price elasticity of supply using the midpoint method;
- Price in Period 1;
- Price in Period 2;
- Quantity supplied in Period 1; and
- Quantity supplied in Period 2.
The importance of price elasticity of supply to businesses
"Time is money" – says the well-known aphorism. It is particularly true in the case of the price elasticity of supply. The business' quick reaction to changing market conditions is crucial: firms aim to make supply more elastic to respond to increased demand and thereby obtain a greater profit.
There are multiple ways to get at this end:
- In case of volatile prices, they may invest in a spare and flexible capacity that can adapt to changes in demand;
- Paying employees overtime in case of increased production;
- Outsource production to other agents; and
- Introduce time management techniques, such as just in time, to increase supply and efficiency.
Flexibility doesn't come without a cost: firms need to find the optimal way to manage flexible supply and costs to reach long-term profitability.
What does price elasticity of supply measure?
The price elasticity of supply measures the responsiveness of the quantity supplied to changes in the price of a given good. If the price elasticity of supply is less than 1, the supply is inelastic; if it is larger than 1, the supply is elastic.
Can the price elasticity of supply be zero?
Yes, if there is no change in the quantity of a supplied good in response to a change in price in that good, we say that the supply is perfectly inelastic and its value is zero.
What are the determinants of the price elasticity of supply?
There are two main determinants of the price elasticity of supply:
- The availability of inputs - Typically, the price elasticity of supply is high when it is easy to obtain its input used for production, and producers can enter and leave the market at a relatively low cost.
- Time - The price elasticity of supply tends to increase if producers have a longer time to respond to a price change. It means that the long-run price elasticity of supply is typically higher than the short-run elasticity.
What is the price elasticity of supply short-run and long-run?
Besides the availability of inputs, time is a crucial factor in the price elasticity of supply. While it is often difficult to alter the production of a given good in response to a price change, it can be adjusted according to the market condition in the longer run.
A real-life example is the agricultural sector. When farmers receive much higher prices for wheat, they are likely to increase the proportion of their land for planting wheat in the following season. Therefore the price elasticity of supply is typically higher in the long-run than in the short-run.