Price Elasticity Of Supply Definition Types Detailed Explanation

Price Elasticity of Supply Definition

Formula

It is calculated by dividing the percentage change in quantity supplied (∆Qs/Qs) by the percentage change in price (∆P/P), which is mathematically represented as,

Price Elasticity of Supply = (∆QS/QS) ÷ (∆P/P)

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Further, the formula for price elasticityFormula For Price ElasticityPrice elasticity is calculated by dividing the percentage change in quantity by percentage change in price. Price elasticity typically refers to price elasticity of demand that measures the response of demand of a particular item to the change in its price. read more of supply can be elaborated to

Price Elasticity of Supply = (Q1S – Q0S) / (Q1S + Q0S) ÷ (P1 – P0) / (P1 + P0),

where Q0S = Initial quantity supplied, Q1S = Final quantity supplied, P0 = Initial price, and P1 = Final price

Explanation

In the above-given formula, the symbol Q0 in the above formula depicts the initial quantity that is demandedQuantity That Is DemandedQuantity demanded is the quantity of a particular commodity at a particular price. It changes with change in price and does not rely on market equilibrium.read more which exists when the Price equals P0. When the quantity supplied changes to Q1, it will be because of P1, which symbolizes the new price.

In the above formula, the Price Elasticity of Supply will be a positive number because of the positive relationship between Quantity supplied and price. As the prices go up, the quantity supplied shall also go up. On the flip side, when the Prices go down, the quantity supplied shall also go down.

Examples

Below we have taken some practical calculation examples of the Price Elasticity of Supply formulaPrice Elasticity Of Supply FormulaPrice elasticity of supply is a measure to identify how the supply of a particular product and service reacts with the change in the price. A higher price elasticity denotes that the producers and sellers of specific goods are highly sensitive to even the slightest changes or price fluctuations.read more to understand it better.

Example #1

Let us take the simple example of pizza. Now let us assume that a surge of 40% in pizza price resulted in an increase in the supply of pizza by 25%. Using the formula as mentioned above, the price elasticity of supply can be calculated as:

Price elasticity of supply formula = Percentage change in quantity supplied / Percentage change in price

Therefore, the pizza exhibited inelastic supply characteristics.

Example #2

Let us assume that a company has installed vending machines for supplying soft drinks. The vending machines sell soft drinks at $3.50 per bottle. Now at this price, the manufacturer supplies 4,000 bottles per week. However, due to some governmental ban, the price has declined to $3.00, resulting in a lower supply of 3,000 bottles per week. Now, the price elasticity of supply can be calculated as below:

Given, Q0S = 4,000 bottles, Q1S = 3,000 bottles, P0 = $3.50 and P1 = $3.00

Therefore,

Price elasticity of supply formula = (Q1S – Q0S) / (Q1S + Q0S) ÷ (P1 – P0) / (P1 + P0)

Price elasticity of supply formula = (3,000 – 4,000) / (3,000 + 4,000) ÷ ($3.00 – $3.50) / ($3.00 + $3.50)

= (-1/7) ÷ (-1/13)

= 13/7 or 1.857

Therefore, the soft drink supplier exhibited elastic supply characteristics.

Types

There are five cases of Price Elasticity of Supply which are discussed below:

#1 – Perfectly Inelastic Supply

The price elasticity of supply in such a case is zero, which indicates that the supply would remain the same irrespective of the commodity’s price.

#2 – Inelastic Supply

In the case of inelastic supply, the change in supply is relatively less than the price change. In this case, it assumes a value that is less than 1.

#3 – Unitary Elastic Supply

In such a case, the change in supply quantity is equal to the change in its price. As such, in this case, it is equal to one.

#4 – Elastic Supply

In the case of elastic supply, the change in supply is relatively greater than the price change. As such, in this case, it assumes a value greater than 1.

#5 – Perfectly Elastic Supply

In such a case, the supply quantity becomes zero even with a slight fall in price and infinite with a slight price increase. It indicates that the suppliers are willing to supply an unlimited quantity of the commodity at a higher price.

Relevance and Uses

A business needs to appreciate the concept and use of this supply to understand the relationship between the price of a good and the corresponding quantity of the commodity that the supplier is willing to supply at that price. It can use it to decide on the batch production of various products.

If the supply quantity fluctuates a lot when the price varies a little, then the product is said to be elastic. It often happens in the case of popular products or services in short supply, for instance. In such a scenario, when the price goes up, the supplier increases the output immediately.

If the quantity supplied changes by a very small margin despite a significant change in prices, then the product is inelastic. It happens when there is a limited supply for the product or service, and as such, the supplier can’t supply despite higher prices.