The price elasticity of supply reveals how much the quantity supplied of a good or service varies in relation to changes in its price .
The price elasticity of supply reveals how much the quantity supplied of a good or service varies in relation to changes in its price. Unlike what happens in the case of the price elasticity of demand, in the price elasticity of supply there is a directly proportional relationship between the market price and the quantities of product that producers are willing to place on the market.
Therefore, changes in quantities will always move in the same direction as prices. This is reasonable, since companies feel a greater incentive to place their products on the market by obtaining higher profits.
Determinants of the price elasticity of supply
The price elasticity of supply depends entirely on a series of factors that take control over it. These are as follows:
- The ability of the company to modify its production, which depends on the technology applied by it.
- Production costs.
- The time factor.
Types of price elasticity of supply
As with the price elasticity of demand, the price elasticity of supply takes into account the degree of elasticity to classify types of elasticities. Thus, in this type of elasticity, five specific types of supply can be distinguished.
- Elastic : It is stated that the supply is elastic when a variation in the price causes a greater change in the quantities offered. When the price elasticity of supply of any good is greater than 1, it is stated that this good is of elastic supply.
- Unitary: This type of elasticity occurs when the price variation causes a change proportionally equal to the quantities supplied of the product. Therefore, this is recognized when the price elasticity of the supply of the good is equal to 1.
- Inelastic: This kind of elasticity becomes evident when a variation in the quantities offered is proportionally less than the change experienced in the price of the good. In this case, when the elasticity is less than 1, the inelastic elasticity is evident.
- Perfectly elastic: Practically this type of elasticity is classified as extreme. In the sense that this occurs when the price elasticity of supply is equal to infinity. It means that a change in supply (no matter how small it is) causes very large changes in price.
- Perfectly inelastic: This type of elasticity, like perfectly elastic elasticity, is also classified as an extreme case of supply elasticity. Since it occurs when the elasticity of supply is equal to zero.
Formula for calculating the price elasticity of supply
As situations arise in which companies, when faced with certain changes in price, slightly modify the quantity produced and placed on the market. In turn, there are situations in which companies, in the face of certain variations in the price of the good, greatly modify the quantities available for the market.
The formula for determining the elasticity of supply consists of dividing the percentage change in the quantity supplied of the product by the percentage change in the price of said product.
The mathematical expression used to carry out the calculation is represented as follows:
The upper part of the formula indicates the absolute change verified in the quantities offered of the product. Meanwhile, the lower part of the formula indicates the absolute change in price. Knowing that (o) reveals the quantity supplied and (P) represents the price of the product.
Likewise, delta O means the absolute change in quantities supplied, and (O) represents the supply. At the bottom, delta P represents the absolute change in price and (P) the price
Example of how to calculate the price elasticity of supply
To know the process of calculating the price elasticity of supply, suppose that the price of chicken breasts increases from 5 euros to 5.50 while the quantities offered for the increase verified in it rises from 1,000 million from kilos to 1,200 million kilos.
Graph- price supply elasticity exercise
Let us now carry out the necessary calculation to determine in this case, which is the coefficient of elasticity of supply.
For this we are going to use the formula previously raised, this is the following:
Step 1: This step is to determine the top of the formula. That is, the percentage change in the quantities offered.
- We determine the absolute change in quantities offered, which is obtained by subtracting the final offer from the initial offer, that is (1,000 – 1,200 = -200)
- Now dividing this value by the initial demand. Thus we have the following: –200 / 1,000 = 0.20 which, taken as a percentage value, is equal (0.20 x 100 = 20%)
This 20% then represents the percentage variation of the quantities demanded. That is, we have determined the upper part of the formula.
Step number 2: This step is to determine the bottom of the formula. That is, the percentage change in the price.
- We determine the absolute change in price, which is obtained by subtracting the final price from the initial price, that is (5.50 – 5 = -0.50).
- Now dividing this value by the initial price. Thus we have the following (0.05 / 5 = 0.10) which, taken as a percentage value, is equal to (0.10 x 100 = 10%).
This 10% then represents the percentage change in the price. That is, we have determined the lower part of the formula.
Note that, as noted in the detail of the formula, the negative sign is conventionally dispensed with.
Step number 3: In this final step, the values determined in steps one and two are substituted in the formula for the elasticity of supply:
So the supply for this product is elastic, since its coefficient of elasticity is greater than one. A change in price has caused a major change in supply.