How to Calculate Price Elasticity of Supply

Price elasticity of supply (PES) measures how much the quantity of a good or service producers are willing to supply responds to a change in its market price. It quantifies how producers adjust their output levels in reaction to price fluctuations. Understanding PES helps businesses and economists anticipate how supply will react to market shifts and make informed decisions.

Understanding Price Elasticity of Supply

Price elasticity of supply quantifies how producers respond to changes in the market price of their goods or services. Basic economic theory suggests that as prices rise, producers are incentivized to supply more, aiming for increased profitability. Conversely, if prices fall, producers might reduce their supply. PES measures the significance of this adjustment in quantity supplied relative to a given price change.

This measurement provides insight into a producer’s flexibility and capacity to increase or decrease production. For example, products easy to manufacture with readily available resources allow producers to quickly increase output when prices climb. However, if production involves complex processes or scarce resources, adjusting supply becomes more challenging. PES helps understand the underlying factors influencing how quickly suppliers can react to market signals.

The Price Elasticity of Supply Formula

The Price Elasticity of Supply (PES) is calculated by dividing the percentage change in quantity supplied by the percentage change in price. This formula provides a standardized measure of responsiveness, regardless of the initial units or currency involved, allowing comparison across different products or industries.

To calculate PES, first determine the percentage change for both quantity supplied and price. The percentage change in quantity supplied is found by dividing the change in quantity by the initial quantity, then multiplying by 100. Similarly, the percentage change in price is found by dividing the change in price by the initial price, then multiplying by 100. The PES formula is: PES = (% Change in Quantity Supplied) / (% Change in Price).

Step-by-Step Calculation of PES

Calculating the Price Elasticity of Supply involves applying the formula after determining the percentage changes for both quantity and price.

Example 1: Elastic Supply

Consider a scenario where the price of a product increases from $5.00 to $6.00, and the quantity supplied rises from 1,000 units to 1,500 units.
Percentage change in quantity supplied: (1,500 – 1,000) / 1,000 = 0.50, or 50%.
Percentage change in price: ($6.00 – $5.00) / $5.00 = 0.20, or 20%.
PES calculation: 50% / 20% = 2.5.
A PES of 2.5 indicates an elastic supply, meaning the quantity supplied changed by a larger percentage than the price change.

Example 2: Inelastic Supply

Imagine a product where the price increases from $10.00 to $12.00, but the quantity supplied only increases from 500 units to 525 units.
Percentage change in quantity supplied: (525 – 500) / 500 = 0.05, or 5%.
Percentage change in price: ($12.00 – $10.00) / $10.00 = 0.20, or 20%.
PES calculation: 5% / 20% = 0.25.
A PES of 0.25 signifies an inelastic supply, indicating producers are not highly responsive to the price change, as the percentage increase in quantity supplied was notably smaller than the percentage increase in price.

Example 3: Unitary Elastic Supply

Consider an item where the price moves from $20.00 to $22.00, and the quantity supplied changes from 400 units to 440 units.
Percentage change in quantity supplied: (440 – 400) / 400 = 0.10, or 10%.
Percentage change in price: ($22.00 – $20.00) / $20.00 = 0.10, or 10%.
PES calculation: 10% / 10% = 1.0.
A PES of 1.0 signifies unitary elastic supply, where the quantity supplied changes by the exact same percentage as the price. This means producers adjust their supply proportionally to price movements.

Interpreting Your PES Results

The numerical value from the PES calculation reveals a product’s supply responsiveness.

Elastic Supply (PES > 1)

If the PES is greater than 1, the supply is considered elastic. This indicates producers are highly responsive to price changes, meaning a small percentage change in price leads to a proportionally larger percentage change in quantity supplied. Businesses with elastic supply can readily adjust production levels, often due to readily available resources or flexible manufacturing processes.

Inelastic Supply (PES < 1)

When the PES is less than 1, the supply is inelastic. This suggests producers are not very responsive to price changes; a percentage change in price results in a proportionally smaller percentage change in quantity supplied. Products with inelastic supply typically face constraints like limited raw materials, specialized production facilities, or long production cycles, making it difficult to quickly alter output.

Unitary Elastic Supply (PES = 1)

A PES exactly equal to 1 signifies unitary elastic supply. Here, the percentage change in quantity supplied is precisely equal to the percentage change in price. Producers adjust their supply proportionally.

Perfectly Elastic Supply (PES = Infinity)

Perfectly elastic supply occurs when the PES is infinite. This implies an infinite quantity can be supplied at a specific price, but nothing at a slightly different price. This is a theoretical concept where producers supply any amount at a given price, but cease supply if the price deviates marginally.

Perfectly Inelastic Supply (PES = 0)

Perfectly inelastic supply is characterized by a PES of 0. This means the quantity supplied does not change at all, regardless of any price fluctuation. This scenario implies producers are unable or unwilling to alter their output, even with significant price incentives.