5.2 ThePrice Elasticity of Supply
The price elasticity of supply measures how responsive the quantity supplied is to a change in the price a good when all other influences on sellers’ plans remain unchanged. The price elasticity of supply compares the percentage change in the quantity supplied to the percentage change in the price.
Elastic andInelastic Supply
Supply iselastic if the percentage change in the quantity supplied exceeds the percentage change in price.
· Ifthe quantity supplied changes by a large percentage in response to a tiny pricechange, then the good is said to have perfectlyelastic supply.
Supply isunit elastic if the percentage change in the quantity supplied equals the percentage change in price.
Supplyis inelasticif the percentage change in the quantity supplied is less than the percentage change in price.
· Ifthe quantity supplied remains constant when the price changes, so that the percentagechange in the quantity supplied is zero, then the good is said to have perfectlyinelastic supply.
Influences onthe Price Elasticity of Supply
The magnitude of the elasticity of supply depends on:
· Productionpossibilities:The more unique or rare are the productive resources used to produce the good,the smaller the elasticity of supply. The more common the productive resourcesused to produce the good, the larger the elasticity of supply.
·Thetime elapsed since the price change: The longer the amount of timeproducers have to adjust to a change in price, the more elastic will be thesupply.
· Storagepossibilities:If the good can be stored, its supply will be more elastic.
Computing thePrice Elasticity of Supply
The price elasticity of supply is equal to:
- The table to the right has two points on the supply curve for pizza from a pizza parlor.
· Thepercentage change in the quantity supplied is[(400 - 300) ¸ 350] ´ 100= 28.6 percent.
· Thepercentage change in price is [($16 - $14) ¸ $15] ´ 100 = 13.3percent.
· Betweenthese two points, the elasticity of supply is 28.6% ¸ 13.3% = 2.15.
