Price Elasticity of Supply

What is this formula?

Price Elasticity of Supply measures how responsive the quantity supplied of a good is to changes in its price.

It quantifies the percentage change in quantity supplied resulting from a one percent change in price.

When to use it

Use this formula when evaluating producer responsiveness, market flexibility, production constraints, and the effects of price changes on supply.

Example

Initial price:

P1 = 20 USD

Final price:

P2 = 24 USD

Initial quantity supplied:

Q1 = 500 units

Final quantity supplied:

Q2 = 600 units

Formula:

Es = ((Q2−Q1)/Q1)/((P2−P1)/P1)

Substitution:

Es = ((600−500)/500)/((24−20)/20)

Es = 0.20/0.20

Es = 1.0

Result:

Supply has unit elasticity. A 1% increase in price produces approximately a 1% increase in quantity supplied.

Applications

- Production planning

- Agricultural economics

- Commodity market analysis

- Industrial economics

- Supply forecasting

Note

This formula uses percentage changes relative to the initial values. Supply elasticity often differs between the short run and the long run because producers may require time to adjust production capacity.