Price Elasticity of Supply

Definition of Price Elasticity of Supply:

The price elasticity of supply is a measure of a company’s ability to increase or decrease production in response to a price change. It is also referred to as the elasticity of supply.

Detailed Explanation:

Flexibility in the manufacturing process is an essential 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. Watch this video to see how two babysitters have different elasticities of supply because their flexibilities differ.

The mathematical formula for the price elasticity of supply is:

An elastic supply curve has a price elasticity of supply that exceeds one. Compare the supply curves below. The more inelastic supply curve is steeper, and a price change has a much smaller impact on the quantity supplied than for the elastic supply curve.

Factors that influence the price 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 rent increase. The increase may not generate an immediate increase in housing. Up-fitting apartments or building apartment buildings takes time.

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 have an input that has a short shelf life and cannot store their final product or inventory parts as readily as other companies.

Capacity: A company with excess capacity has a more elastic supply curve than a company that is producing at capacity because it is much for the company with excess capacity to increase output. A company operating near capacity may need to hire more workers or purchase additional equipment to increase production.