# Definition of Price Elasticity of Supply

## The price elasticity of supply is the measure of the responsiveness in quantity supplied to a change in price for a specific good.

#### Key Points

• Elasticity is defined as a proportionate change in one variable over the proportionate change in another variable: $Elasticity \;= \; \frac{\%\; Change\; in\; quantity}{\%\; Change\; in\; price}$

• The impact that a price change has on the elasticity of supply also directly impacts the elasticity of demand.

• Inelastic goods are often described as necessities, while elastic goods are considered luxury items.

• The elasticity of a good will be labelled as perfectly elastic, relatively elastic, unit elastic, relatively inelastic, or perfectly inelastic.

#### Terms

• Something very pleasant but not really needed in life.

• The desire to purchase goods and services.

• The amount of some product that producers are willing and able to sell at a given price, all other factors being held constant.

#### Figures

1. ##### Perfectly Inelastic Supply

A graphical representation of perfectly inelastic supply.

In economics, elasticity is a summary measure of how the supply or demand of a particular good is influenced by changes in price. Elasticity is defined as a proportionate change in one variable over the proportionate change in another variable:

$Elasticity \;= \; \frac{\%\; Change\; in\; quantity}{\%\; Change\; in\; price}$

The price elasticity of supply (PES) is the measure of the responsiveness in quantity supplied (QS) to a change in price for a specific good (% Change QS / % Change in Price). There are numerous factors that directly impact the elasticity of supply for a good including stock, time period, availability of substitutes, and spare capacity. The state of these factors for a particular good will determine if the price elasticity of supply is elastic or inelastic in regards to a change in price.

The price elasticity of supply has a range of values:

• PES > 1: Supply is elastic
• PES < 1: Supply is inelastic
• PES = 0: if the supply curve is vertical and there is no response to prices. This is called perfectly inelastic.
• PES = infinity: if the supply curve it horizontal. This is called perfectly elastic (Figure 1).

Inelastic goods are often described as necessities. A shift in price does not drastically impact consumer demand or the overall supply of the good because it is not something people are able or willing to go without. Examples of inelastic goods would be water, gasoline, housing, and food.

Elastic goods are usually viewed as luxury items. An increase in price for an elastic good has a noticeable impact on consumption. The good is viewed as something that individuals are willing to sacrifice in order to save money. An example of an elastic good is movie tickets, which are viewed as entertainment and not a necessity.

The price elasticity of supply is determined by:

• Number of producers: ease of entry into the market.
• Spare capacity: it is easy to increase production if there is a shift in demand.
• Ease of switching: if production of goods can be varied, supply is more elastic.
• Ease of storage: when goods can be stored easily, the elastic response increases demand.
• Length of production period: quick production responds to a price increase easier.
• Time period of training: when a firm invests in capital the supply is more elastic in its response to price increases.
• Factor mobility: when moving resources into the industry is easier, the supply curve in more elastic.
• Reaction of costs: if costs rise slowly it will stimulate an increase in quantity supplied. If cost rise rapidly the stimulus to production will be choked off quickly.

The result of calculating the elasticity of the supply and demand of a product according to price changes illustrates consumer preferences and needs . The elasticity of a good will be labelled as perfectly elastic, relatively elastic, unit elastic, relatively inelastic, or perfectly inelastic.

#### Key Term Glossary

capacity
The maximum that can be produced on a machine or in a facility or group.
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capital
Already-produced durable goods available for use as a factor of production, such as steam shovels (equipment) and office buildings (structures).
##### Appears in these related concepts:
consumer
An individual who trades money for goods.
##### Appears in these related concepts:
consumption
In the expenditure approach, the amount of goods and services purchased for consumption by individuals.
##### Appears in these related concepts:
cost
A negative consequence or loss that occurs or is required to occur.
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demand
The desire to purchase goods and services.
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economics
The study of resource allocation, distribution and consumption; of capital and investment; and of management of the factors of production.
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elastic
Sensitive to changes in price.
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Elastic
Demand for a good is elastic when a change in price has a relatively large effect on the quantity of the good demanded.
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elasticities
Elasticity is the ratio of the percentage change in one variable to the percentage change in another variable. It is a tool for measuring the responsiveness of a function to changes in parameters in a unitless way.
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elasticity
The sensitivity of changes in a quantity with respect to changes in another quantity.
firm
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goods
That which is produced, then traded, bought, or sold, and finally consumed.
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inelastic
Not sensitive to changes in price.
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Inelastic
Demand for a good is inelastic when a change in price has a relatively small effect on the quantity of the good demanded.
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luxury
Something very pleasant but not really needed in life.
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market
one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services (including labor) in exchange for money from buyers.
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mobility
The ability for economic factors to move between actors or conditions.
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money
A legally or socially binding conceptual contract of entitlement to wealth, void of intrinsic value, payable for all debts and taxes, and regulated in supply.
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perfectly elastic
A type of goods such that infinitesimally small changes in price cause infinitely large changes in quantity supplied.
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Perfectly elastic
Describes a situation when any increase in the price, no matter how small, will cause demand for a good to drop to zero.
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perfectly inelastic
An elasticity equal to zero; the elasticity of a type of goods for which quantity supplied does not change regardless of the price of the goods.
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price
The cost required to gain possession of something.
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Price
The quantity of payment or compensation given by one party to another in return for goods or services.
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price elasticity
A measure of how a product's demand and supply will change if you adjust its price.
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Stimulus
Anything that may have an impact or influence on a system. In 2009, it is the monetary investments in the economy to recover from the collapse.
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stock
The capital raised by a company through the issue of shares. The total of shares held by an individual shareholder.
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Substitute
A good with a positive cross elasticity of demand, meaning the good's demand is increased when the price of another is increased.
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supply
The amount of some product that producers are willing and able to sell at a given price, all other factors being held constant.
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supply and demand
An economic model of price determination in a market based upon the quantity demanded by consumers in relation to the quantity supplied by producers.
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Supply curve
A graphical representation of the quantity producers are willing to make when the product can be sold at a given price.
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Unit Elastic
Demand for a good is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price.
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value
The amount (of money or goods or services) that is considered to be a fair equivalent for something else.
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variable
something whose value may be dictated or discovered.