A good or service has an inelastic supply when the percentage change in the quantity supplied is less than the percentage change in price. In most cases, the provider is limited in how quickly it can respond to a price change.
Flexibility in the manufacturing process is an important factor in determining whether a company has an elastic or inelastic supply curve. Companies producing a good or service with an elastic supply can respond quickly to a change in price. The mathematical formula for the elasticity of supply is:
An inelastic supply curve has a price elasticity of supply that is less than one. Compare the supply curves below. The more inelastic supply curve is steeper and a change in price has a much smaller impact on the quantity supplied than for the elastic supply curve.
Factors that influence the elasticity of supply include:
Time: Long-term supply curves are more elastic than short-term curves because of the flexibility that time provides to respond to market changes. For example, assume a community experiences a sudden increase in rent. The increase may not generate an immediate increase in housing. It takes time for homeowners to up-fit apartments or build apartment buildings.
Availability of Inputs: If a company needs to search or wait for inputs its supply is more inelastic than a company that has the inputs readily available. For example, compare a lawn mowing service with a hospital. The lawn mowing company would probably be able to hire additional workers in a few weeks since the work requires little skill. A hospital may take months to identify and negotiate with a highly qualified surgeon. In this case, the lawn mowing company has a more elastic supply curve than the hospital.
Ease of Storage: Some companies can increase their elasticity of supply by stockpiling parts or the final product so they can respond quickly to a price increase. Other companies do not have that flexibility. Producers that manufacture a good that is perishable or has an input that has a short shelf life are unable to store their final product or inventory parts as readily as other companies.
Capacity: A company that has excess capacity has a more elastic supply curve than a company that is producing at capacity because it is much easier for it to increase production than it would be for a company near capacity that may need to hire more workers or purchase additional equipment to increase output.
Price Elasticity of Supply – How Does a Producer Respond To a Price Change
Supply – The Producer's Perspective
Factors of Production – The Required Inputs of Every Business
Price Elasticity of Demand – How Do Consumers Respond to Price Changes