Price Elasticity of Supply

Meaning of Price Elasticity of Supply

This concept is parallel to the concept of price elasticity of demand.

It points out the reaction of the sellers to a particular change in the price of the commodity.

It explains the quantitative changes in the supply of a commodity due to a given change in the price of the commodity.

Price Elasticity of Supply

Price elasticity of supply refers to the degree of responsiveness of the supply of a commodity with reference to a change in the price of such commodity.

If the price elasticity of supply is 2, it means that a one percent fall in price leads to a 2 percent fall in supply, or a one percent rise in price leads to a 2 percent rise in supply.

Percentage Method (Proportionate Method)

Like elasticity of demand, the most common method for measuring price elasticity of supply (Es) is the percentage method — also known as the 'Proportionate Method'. According to this method, elasticity is measured as the ratio of percentage change in the quantity supplied to percentage change in the price.

Price Elasticity of Supply (E_s)

Percentage Change in Quantity Supplied ÷ Percentage Change in Price

Es = %ΔQs ÷ %ΔP

Component 1

Percentage Change in Quantity Supplied = (Change in Quantity Supplied ΔQ ÷ Initial Quantity Supplied Q) × 100

Component 2

Change in Quantity (ΔQ) = New Quantity (Q₁) − Initial Quantity (Q)

Component 3

Percentage Change in Price = (Change in Price ΔP ÷ Initial Price P) × 100

Component 4

Change in Price (ΔP) = New Price (P₁) − Initial Price (P)

Step 1

Es = (ΔQ ÷ Q × 100) ÷ (ΔP ÷ P × 100)

Step 2

Es = (ΔQ ÷ Q) ÷ (ΔP ÷ P)

Result

Es = (ΔQ ÷ ΔP) × (P ÷ Q)

Elasticity of Supply (Proportionate Method)

E_s = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q}

Where: Q = Initial Quantity Supplied, ΔQ = Change in Quantity Supplied, P = Initial Price, ΔP = Change in Price

Solved Example

Problem

Suppose, at the price of ₹10 per unit, a firm supplies 50 units of a commodity. When the price rises to ₹12 per unit, the firm increases the supply to 70 units. Calculate the price elasticity of supply.

Solution

Es = 2

Elasticity of Supply Calculator

E_s = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q}

Initial Quantity (Q)

units

New Quantity (Q₁)

units

Initial Price (P)

₹

New Price (P₁)

₹

% Change in Quantity Supplied

40 %

% Change in Price

20 %

Elasticity of Supply (E_s)

2

The coefficient of price elasticity of supply is a pure number and is independent of price and quantity units. It happens because elasticity considers percentage change in price and quantity supplied.

Elasticity of supply will always have a positive sign, as against the negative sign of elasticity of demand. It happens because of the direct relationship between price and quantity supplied.

For measuring price elasticity of supply by the 'Geometric Method', refer to the Power Booster Section.

Kinds of Elasticity of Supply

Different commodities respond differently to a given change in price. Depending upon the degree of responsiveness of the quantity supplied to the price change, there are five kinds of price elasticities of supply.

When there is an infinite supply at a particular price and the supply becomes zero with a slight fall in price, then the supply of such a commodity is said to be perfectly elastic.

Price (₹)	Supply (units)
30	100
30	200
30	300

Quantity supplied can be 100, 200 or 300 units at the same price of ₹30. Perfectly elastic supply is an imaginary situation.

When the supply does not change with change in price, then supply for such a commodity is said to be perfectly inelastic.

Price (₹)	Supply (units)
20	20
30	20
40	20

Quantity supplied remains the same at 20 units, whether the price is ₹20, ₹30 or ₹40. Perfectly inelastic supply is an imaginary situation.

When percentage change in quantity supplied is more than the percentage change in price, then supply for such a commodity is said to be highly elastic.

Price (₹)	Supply (units)
10	100
15	200

Quantity supplied rises by 100% due to a 50% rise in price. E_s > 1.

When percentage change in quantity supplied is less than the percentage change in price, then supply for such a commodity is said to be less elastic.

Price (₹)	Supply (units)
10	100
15	120

Quantity supplied rises by 20% due to a 50% rise in price. E_s < 1.

When percentage change in quantity supplied is equal to percentage change in price, then supply for such a commodity is said to be unitary elastic.

Price (₹)	Supply (units)
10	100
15	150

Quantity supplied rises by 50% due to a 50% rise in price. E_s = 1.

Important Observations

Fig 9.25 — All Curves Through Origin (Unitary Elastic)

All the supply curves which pass through the origin are unitary elastic. In Fig 9.25, A, B and C are the supply curves of three different commodities — the price elasticity of supply for all 3 curves is equal to one. Although A is steeper and C is flatter, elasticity will be equal to one.

Fig 9.26 — Flatter Curve is More Elastic

At point E, OQ quantity is supplied at the price of OP.

When price falls from OP to OP₁, quantity supplied falls from OQ to OQ₂ for supply curve SS and from OQ to OQ₁ for supply curve S₁S₁.

With the same change in price (PP₁), the change in supply (QQ₂) in case of supply curve SS is more than the change in supply (QQ₁) under supply curve S₁S₁.

It means supply is more elastic in case of SS (flatter curve) as compared to S₁S₁ (steeper curve).

Quick Recap — Coefficients of E_s
Type	Value	Description
Perfectly Elastic	E_s = ∞	Infinite supply at same price
Perfectly Inelastic	E_s = 0	Same supply at all prices
Highly Elastic	E_s > 1	%Δ in Supply > %Δ in Price
Less Elastic	E_s < 1	%Δ in Supply < %Δ in Price
Unitary Elastic	E_s = 1	%Δ in Supply = %Δ in Price

Fig 9.27 — All Five Elasticity Curves

Time Period and Supply

The supply of a commodity cannot be changed overnight — it takes time to change the supply. From the viewpoint of supply, time has been broadly divided into three periods:

Market Period

Very Short Period

Market period refers to a very short period in which the supply cannot be changed in response to the change in demand. The supply of a commodity takes time to adjust itself to a change in the demand condition. So, in the market period, supply is limited, like in the case of perishable goods (vegetables, fruits, milk, etc.). The supply curve is a straight line parallel to the Y-axis (perfectly inelastic).

E_s = 0 (Perfectly Inelastic)

Short Period

Short period refers to a period in which output (supply) can be changed by changing only variable factors. Supply is less responsive to changes in demand — the supply curve is less elastic.

E_s < 1 (Less Elastic)

Long Period

Long period refers to a period in which output (supply) can be changed by changing all factors of production. Therefore, supply becomes more responsive to change in demand — the supply curve is highly elastic.

E_s > 1 (Highly Elastic)

For 'Factors Affecting Elasticity of Supply', refer to the Power Booster Section.

Solved Practicals — Schedule, Function and Elasticity

Elasticity of Supply (E_s)

Percentage Change in Quantity Supplied ÷ Percentage Change in Price

Elasticity of Supply (E_s)

(ΔQ ÷ ΔP) × (P ÷ Q) OR (1 ÷ Slope of Supply Curve) × (P ÷ Q)

Slope of Supply Curve = ΔP ÷ ΔQ

Solved Practicals — 30 Examples

30 problems

Group A — Supply Schedule and Supply Function (Examples 1–5)

Price	X	Y	Z	Market
1	5	7	10	22
2	7	9	12	28
3	10	15	18	43
4	15	20	25	60
5	20	30	27	77

Market Supply = X + Y + Z.

C = Market Supply − A − B. C = 10, 20, 25, 40, 50.

Pₓ	5	4	3	2
Qₓ	35	32	29	26

Put P values in Qₓ = 20 + 3Pₓ.

(i) 4 units. (ii) ₹5. (iii) ₹30.

Put p=7: Qₓ = −10+14 = 4.
Put Qₓ=0: 0=−10+2p → p=5.
Put Qₓ=50: 50=−10+2p → p=30.

Q_Market = −50+5p for p≥10; 0 for p<10.

Group B — Elasticity: Price and Quantity Given (Examples 6–11)

Es = 100÷2 × 60÷400 = 7.5 (highly elastic).

Es = 50÷5 × 15÷100 = 1.5 (highly elastic).

Es = 50÷5 × 10÷50 = 2 (highly elastic).

Es = 150÷3 × 12÷500 = 1.20 (highly elastic).

Es = 250÷1 × 4÷600 = 1.67 (highly elastic).

A: Es=1 (unitary). B: Es=2 (highly elastic). Proportionate change differs.

Group C — Percentage Method (Examples 12–16)

Es = 25%÷20% = 1.25 (highly elastic).

%ΔQ=400%, %ΔP=100% → Es = 4 (highly elastic).

%ΔP=25%, %ΔQ=20% → Es = 0.8 (less elastic).

%ΔQ=20%, Es = 20%÷10% = 2 (highly elastic).

%ΔP=25%, Es = 25%÷25% = 1 (unitary).

Group D — Calculation of Price or Quantity (Examples 17–21)

ΔQ=8; New Q = 28 units.

ΔQ=75; New Q = 275 units.

ΔQ=150; New Q = 150 units.

Q=1,250; New Q = 750 units.

ΔQ=30; New Q = 60 units.

Group E — Comparative and Ratio Problems (Examples 22–27)

%ΔQ = 1.5 × 60% = 90%.

Es=1.25; %ΔQ(Y) = 10% fall.

Es=0.8; %ΔQ(Y) = 8% rise.

Es(Y)=3, Es(X)=1.5; %ΔQ(X) = 30% fall.

Es(A)=2, Es(B)=3; %ΔQ(B) = 30% rise.

Es=1; Q = 25 units.

Group F — Total Receipts Method (Examples 28–30)

Q: 100→120. Es = 20÷10 × 60÷100 = 1.2 (highly elastic).

New P=₹6, Q=200. Es = 40÷1 × 5÷160 = 1.25 (highly elastic).

Original Q=18 units; Es=4.44 (highly elastic).

Original P: x = 45 + 10% of x → x=₹50.
Original TR = 2×450 = ₹900.
Original Q = 900÷50 = 18.
Es = 8÷5 × 50÷18 = 4.44.

Key Takeaways

Es measures the responsiveness of quantity supplied to a change in own price: Es = %ΔQs ÷ %ΔP = ΔQ/ΔP × P/Q. ⭐
Es is always positive (direct relationship) and unit-free. ⭐
Five kinds: perfectly elastic (∞, horizontal), perfectly inelastic (0, vertical), highly elastic (> 1), less elastic (< 1), unitary elastic (= 1, through the origin). ⭐
Any straight-line supply curve through the origin has Es = 1; at the point of intersection, the flatter curve is more elastic. ⭐
Time period matters: market period (perfectly inelastic), short period (less elastic), long period (highly elastic). ⭐

Notes

Meaning of Price Elasticity of Supply

Percentage Method (Proportionate Method)

Kinds of Elasticity of Supply

Perfectly Elastic Supply

Perfectly Inelastic Supply

Highly Elastic Supply

Less Elastic Supply

Unitary Elastic Supply

Important Observations

Time Period and Supply

Market Period

Short Period

Long Period

Solved Practicals — Schedule, Function and Elasticity

Solved Practicals — 30 Examples

Key Takeaways